CLUT 1.2, 10.4 Return on HC's Stock REQUIRED RATE OF RETURN (Percent) 0,5 RISK (Beta) CAPM Elements Value Risk-free rate (TRF) 5.0% Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 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 in the graph to see their coordinates Now SML REQUIRED RATE OF RETURN (Percent) REQUIRED RATE OF RETU 0.8 - 12 RISK (Beta) The SML helps determine the level of risk aversion among investors. The higher the level of risk aversion, the the slope of the SML. 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?) All stocks affected the same, regardless of beta Low-beta stocks High-beta stocks Medium-beta stocks