Attempts: Keep the Highest: 4/5 11. 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: (? 20.0 10.0 12.0 Return on HC's Stock 8.0 REQUIRED RATE OF 4.0 0 0.5 1.5 2.0 1.0 RISK (Beta) Value CAPM Elements Risk-free rate (TRP) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 5.0% 4.5% 1.2 10.4% Points: 1/1 Explanation: Close Explanation The risk-free rate (CRP) is the vertical intercept of the SML, and the market risk premium (RPM) is the slope of the SML. To find out that rrr = 5.0%, you can either place your cursor on the point on the vertical axis, which is (0,5.0%), or roll your cursor over the SML to see that the Intercept of the line is 5.0%. When you roll your cursor over the SML, you will see that the line's slope is 4.5; hence, RPM = 4.5%. Place your cursor on the point where Happy Corp. stock intersects the SML. The horizontal coordinate is the beta, which is 1.2, and the vertical coordinate is the required return from the stock, which is 10.4%. . 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 12.4% Points: 11/1 Tooltip: Mouse over the points on the graph to see their coordinates. (? Your Answer Correct Answer 20 X New SML 16 RETURN (Percent) 12 Attempts: Keep the Highest: 4/5 11. 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: (? 20.0 10.0 12.0 Return on HC's Stock 8.0 REQUIRED RATE OF 4.0 0 0.5 1.5 2.0 1.0 RISK (Beta) Value CAPM Elements Risk-free rate (TRP) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 5.0% 4.5% 1.2 10.4% Points: 1/1 Explanation: Close Explanation The risk-free rate (CRP) is the vertical intercept of the SML, and the market risk premium (RPM) is the slope of the SML. To find out that rrr = 5.0%, you can either place your cursor on the point on the vertical axis, which is (0,5.0%), or roll your cursor over the SML to see that the Intercept of the line is 5.0%. When you roll your cursor over the SML, you will see that the line's slope is 4.5; hence, RPM = 4.5%. Place your cursor on the point where Happy Corp. stock intersects the SML. The horizontal coordinate is the beta, which is 1.2, and the vertical coordinate is the required return from the stock, which is 10.4%. . 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 12.4% Points: 11/1 Tooltip: Mouse over the points on the graph to see their coordinates. (? Your Answer Correct Answer 20 X New SML 16 RETURN (Percent) 12
