Ch 08: Assignment - Risk and Rates of Return 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: 20.0 100 120 Return on HC's Stock REQUIRED RATE OF RETURN (Percent) 80 OLUN (? 20.0 160 1.2, 10.4 120 Return on HC's Stock REQUIRED RATE OF RETURN (Percent) 80 40 0.5 1.5 2.0 1.0 RISK (Beta) Value CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock An analyst belleves 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 air coordinates 28.5% 8.79 CAPM Elements Value Risk-free rate (TRF) Market risk premium (RPM) 5.0% Happy Corp. stock's beta Required rate of return on Happy Corp. stock 10.4% 2.8% % over the n An analyst believes that inflation is going to increa the Capital Asset Pricing Model (CAPM). The follow 5.5% plots the cur Market risk premium (RPM) Happy Corp. stock's beta 8.1% Required rate of return on Happy Corp. stock 3.4% % overt An analyst believes that inflation is going to increa the Capital Asset Pricing Model (CAPM). The follow 4.5% h plots the 5.9% Calculate Happy Corp.'s new required return. Then graph, use Happy Corp. stock's beta Required rate of return on Happy Corp. stock 1.9 An analyst believes that inflation is going to increa 1.2 1.0% ov the Capital Asset Pricing Model (CAPM). The follow ph plot 2.8 Calculate Happy Corp.'s new required return. Then e graph 0.3 analyst's prediction. Required rate of return on Happy Corp. stock 9.4% An analyst believes that inflation is going to increa Po over th the Capital Asset Pricing Model (CAPM). The follow 13.0% plots the Calculate Happy Corp.'s new required return. Then 10.4% raph, use analyst's prediction. 8.8%