3. 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 (HC). Based on the graph, complete the table that follows: 2 200 160 120 REQUIRED RATE OF RETURN (Percent) 9 Rtum on HC's Stock 10 1 1 0 0 05 19 RISK (Beta) 15 2.0 Value CAPM Elements Risk-free rate() 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 Tooltip: Mouse over the points on the graph to see their coordinates. 20 16 Now SML REQUIRED RATE OF RETURN (Percent) 04 08 12 RISK (Beta) 20 Tool tip: Mouse over the points on the graph to see their coordinates. (?) 20 New SML 12 REQUIRED RATE OF RETURN (Percent) 0 0 0.4 1.6 2.0 0.8 1.2 RISK (Betal REQUIRED RATE 04 16 20 08 12 RISK (Beta) SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML Eh of the following statements best describes a shift in the SML caused by increased risk aversion? The risk-free rate will increase The risk-free rate will decrease. The risk-free rate will remain constant