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:

CAPM Elements

Risk$-$free rate $($rRF$)$

Market risk premium $($RPM$)$

Happy Corp. stock's beta

Required rate of return on Happy Corp. stock

Value

An analyst believes that inflation is going to increase by $2\mathrm{.}0\%$ 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.$\text{'}$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.$\text{'}$s new required rate of return is

Tool tip: Mouse over the points on the graph to see their coordinates.