Ch 08: Assignment - Risk and Rates of Return 20.0 REQUIRED RATE OF RETURN (Percent) Return on HC's Stock RISK (Beta) Value 4.09 CAPM Elements Risk-free rate (CRP) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 0.6 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 Tooltip: Mouse over the points on the graph to see their coordinates. Tool tip: Mouse over the points on the graph to see their coordinates. New SML REQUIRED RATE OF RETURN (Percent) 0.8 1.2 RISK (Beta) 2.0 Ch 08: Assignment - Risk and Rates of Return REQUIRE RISK (Beta) The SML helps determine the level of risk aversion among investors. The steeper the slope of the SML, the the level of risk aversion Which kind of stock is most affected by changes in risk aversion? (In other words, which stocks see the biggest change in their required returns?) Medium-beta stocks All stocks affected the same, regardless of beta High-beta stocks Low-beta stocks Ch 08: Assignment - Risk and Rates of Return 20.0 REQUIRED RATE OF RETURN (Percent) Return on HC's Stock RISK (Beta) Value 4.09 CAPM Elements Risk-free rate (CRP) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 0.6 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 Tooltip: Mouse over the points on the graph to see their coordinates. Tool tip: Mouse over the points on the graph to see their coordinates. New SML REQUIRED RATE OF RETURN (Percent) 0.8 1.2 RISK (Beta) 2.0 Ch 08: Assignment - Risk and Rates of Return REQUIRE RISK (Beta) The SML helps determine the level of risk aversion among investors. The steeper the slope of the SML, the the level of risk aversion Which kind of stock is most affected by changes in risk aversion? (In other words, which stocks see the biggest change in their required returns?) Medium-beta stocks All stocks affected the same, regardless of beta High-beta stocks Low-beta stocks
