CAPM Elements Choices

Risk Free Options 8,1.1,2.0,2.2

Market Risk Premium 7.8,10.8,4.5,6.0

Happy Corp Stocks Beta 1.0,.3,2.3,1.6

Required rate of return on HC stock 7.2,6.8,10,8

Chang to the security market line The following graph plots the current security market line (SML) and indicates the retum that in holding stock from Happy Corp. (Hcy. Based on the graph, complete the table that follows. require from REQUIRED RA OF RETURN (Percent 0.0 RISK Beta CAPM Elements Value Risk-free rate Market risk premium (RP Happy Corp. stock's beta Required 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 plots the current sML calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle symbols) to plat 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. REQUIRED RATE OF RETURN IPercentl 0.0 04 08 1.2 1.6 2.0 RISK (Bet