20.0 16.0 120 REQUIRED RATE OF RETURN (Percent) Return on HC's Stock 8.0 1 - 1 1 1 1 4.0 0 0.5 1.5 2.0 1.0 RISK (Beta) Value CAPM Elements 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 3,0% 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'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's new required rate of return is Tool tip: mouse over the points on the graph to see their coordinates. ? 20 O New SML 16 REQUIRED RATE OF RETURN (Percent) - 0 04 0.8 1.6 20 12 RISK (Beta) 12 The SML helps determine the risk-aversion level among investors. The steeper the slope of the SML, the the level of risk aversion Which of the following statements best describes the shape of the SML if investors were not at all risk averse? The SMi. would have a positive slope, but the slope would be flotter than it would be if investors were risk averse The SML would have a negative stope The SML would be a horizontal line. The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse