3 20.0 180 1.2. 10.4 12.0 Retum on HC Stock REQUIRED RATE OF RETURN(Percent) BO 40 1 1 D 1.5 20 10 RISK (Beta) UITLLUR 20.0 180 120 Slope: 4.50 Y-Intercept: 5 Return on HC's Stock REQUIRED RATE OF RETURN (Percent) 8 60 4.9 025 1,5 20 1.0 RISK (Beta) Value 5.0% CAPM Elements Risk-free rate (RF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 5.9% 1.2 13.0% 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 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 20 16 New SML REQUIRED RATE OF RETURN (Percent) 04 1.6 20 0.8 52 RISK (Beta) The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML Which of the following statements best describes a shift in the SML caused by increased risk aversion? The risk-free rate will remain constant The risk-free rate will increase. The risk-free rate will decrease