11. 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: 200 100 12.0 REQUIRED RATE OF RETURN (Percent) Return on HC's Stock 80 1 40 0 15 2.0 05 10 RISK (Beta) DU TULUJUI Return CAPM Elements Value Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 2.0% over the next year, while the market risk premium will be unchanged. The analys the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp's new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by th analyst's prediction Happy Corp's new required rate of return is Tooltip: Mouse over the points on the graph to see their coordinates, 20 -- Now SML 16 EETURN (Percent) 08: Assignment - Risk and Rates of Return 20 New SML 16 12 REQUIRED RATE OF RETURN (Percent) 4 0 10 20 0 0.4 08 12 RISK (Beta) the slope of the SML The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the Which of the following statements best describes the shape of the SML ir investors were not at all risk averse? The SML would have a negative slope. The SML would have a positive slope, but the slope would be latter than it would be if investors were risk everse The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse. The SML would be a horizontal line