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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
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 the slope of the SML. REQUIRED RATE OF RETURN (Percent) 0 New SML 1.2 0 0.4 1.6 2.0 0.8 RISK (Beta) The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the
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