$13.$ Changes to the security market line

The following graph plots the current security market line $($SML$)$ and indicates the return that investors require from holding stock from Happy Corp. $($HC$).$ Based on the graph, complete the table that follows.

CAPM Elements

Value

Risk$-$free rate $\backslash (\backslash$left$($r$\_\{\backslash$mathbf$\{$R F$\}\}\backslash$right$)\backslash )$

Market risk premium $\backslash (\backslash$left$(\backslash$mathrm$\{$RP$\}\_\{\backslash$mathbf$\{$M$\}\}\backslash$right$)\backslash )$

Happy Corp. stock's beta

Required rate of return on Happy Corp. stock

An analyst believes that inflation is going to increase by $\backslash (2\mathrm{.}0\backslash \%\backslash )$ over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model $($CAPM$).$ The following graph plots the current SML$.$

Calculate Happy Corp.$\text{'}$s new required return. Then, on the graph, use the green points $($rectangle symbols$)$ to plot the new SML suggested by this analyst's prediction. An analyst believes that inflation is going to increase by $\backslash (2\mathrm{.}0\backslash \%\backslash )$ over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model $($CAPM$).$ The following graph plots the current SML$.$

Calculate Happy Corp.$\text{'}$s new required return. Then, on the graph, use the green points $($rectangle symbols$)$ to plot the new SML suggested by this analyst's prediction.

Happy Corp.$\text{'}$s new required rate of return is

Tool tip: Mouse over the points in the graph to see their coordinates.

Which kind of stock is most affected by changes in risk aversion? $($In other words, which stocks see the biggest change in their required returns?$)$

All stocks affected the same, regardless of beta

Low$-$beta stocks

Medium$-$beta stocks

High$-$beta stocks