8. Changes to the security market line The following graph plots the current security market tine (SML) and indicates the return that investors require from holding stock from Happy Corp, (HC). Based on the graph complete the table that follows: 2 200 16.0 120 Return on HC's Stock REQUIRED RATE OF RETURN (Parcent) 0 D 1 0 0 os 15 20 10 RISK (Beta) CAPM Elements Value Value 5.0% CAPM Elements Risk-free rate (O) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 2.8% 5.0% An analyst believes that inflation is going to increa the Capital Asset Pricing Model (CAPM). The follow 10.496 over the next year, while the market risk premium will be unchanged. The analyst uses 5.5% 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 CAPM Elements Value Risk-free rate (PRP 5.0% Market risk premium (RPM) 5.99 Happy Corp. stock's beta 4.5% Required rate of return on Happy Corp. stock 8.1% An analyst believes that inflation is going to increa b% over the next year, while the market risk premium will be unchanged. The analyst uses 5.9% the Capital Asset Pricing Model (CAPM). The follow plots the current SML 3.4% Calculate Happy Corp.'s new required return. Then graph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction Value 5.0% CAPM Elements Risk-free rate (r) Market risk premium (RPM) Happy Corp, stock's beta Required rate of return on Happy Corp, stock 5.99 1.2 1.9 0.3 An analyst believes that inflation is going to increa 1.2 % over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The follow In plots the current SML Calculate Happy Corp.'s new required return. Ther graph, use the green points (rectangle symbols) to plot the new SML suggested by this 2.8 analyst's prediction Value CAPM Elements Risk-free rate (RF) Market risk premium (RPM) Happy Corp, stock's beta Required rate of return on Happy Corp, stock 5.09 5.99 1.2 13.0 13.0% An analyst believes that inflation is going to increa s over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The follow 8.8% plots the current SML Calculate Happy Corp's new required return. Then 10.4%raph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction. 9.49 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 13.6% Tooltip: Mouse over the points on the graph to see their coordinates Now SML 16 REQUIRED RATE OF RETURN Percent) 20 00 12 RISK (Beta) REQUIRED FATE OF RET 04 2.0 12 RISK (Beta) The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the steeper the slope of the SML Hatter Which of the following statements best describes the shape of the SML i investors were not at all risk overs steeper The SML would have a positive slope, but the slope would be steeper than it would be if Investors The SML would be a hortzontal line. Javerse The SML would have a negative slope. The SML would have a positive slope, but the slope would be flatter than it would be ir investors were risk averse Which of the following statements best describes the shape of the SML if investors were not at all risk averse? The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse. The SML would be a horizontal tine. The SML would have a negative slope. The SML would have a positive slope, but the slope would be fatter than it would be if Investors were risk averse