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5. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require
5. 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: REQUIRED RATE OF RETURN (Percent) 200 180 12.0 Return on HC's Stock OP 8.0 4.0 0.5 10 RISK (Beta) 15 CAPM Elements Risk-free rate (n) Market risk premium (RP) Happy Corp. stock's beta Required rate of return on Happy Corp. stock Value 5.0%- 3.4%->> 114 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 Harny Corp. new required return. Then, on the graph, use the green points (rectangle symbols) to plot the new SHL suggested by this analyst's prediction Happy Corp's new required rate of return is 12.4%
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