200 100 120 1,8 REQUIRED RATE OF RETURN Perceno Return on HC's Stock 10 1 40 0 O 15 20 10 RISK (Beta) Value CAPM Elements Risk-free rate (ru) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp, stock 11 An analyst believes that inflation is going to increase by 3,0%-over the next year, while the market risk premium will be unchanged. The analyst yes the Capital Asset Pricing Model (CAPM). The following graph plots the current SML Calculate Happy Corp's new required retum Then, on the graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction 2 Happy Corp.'s new required rate of return is 11,0% Tool tip: Mouse over the points on the graph to see their coordinates. ? 20 New SML 10 12 REQUIRED RATE OF RETURN(Percent) 10 2.0 08 12 RISK (Beta) The SML helps determine the level of risk aversion among investors. The steeper the slope the SML the the level of risk aversion Which kind of stock is most affected by changes in risk aversion? (In other words, which stocks see the biggest change in their required retums?) High-beta stocks Medium-beta stocks All stocks affected the same, regardless of beta Low-beta stocks