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The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: Required return on Stock Risk-free return +(Market risk premium)(Stock's beta) sufficient to compensate the investor for risk. If a stock's expected return plots below the If a stock's expected return plots on or above the SML, then the stock's return is SML, the stock's return is insuficient to compensate the investor for risk The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk overse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses. Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): TRE5%; H = 10%; RPM = 5%, and beta - 1.3 What is WCE's required rate of return? Do not round Intermediate calculations. Round your answer to two decimal places. required rate of return now? Do not round intermediate calculations. Round your If inflation increases by but there is no change in investors' risk version, what is WC answer to two decimal places. Assume now that there is no change in inflation, but risk aversion increases by 15. What is WC's required rate of return now? Do not round intermediate calculations. Round your answer to two decimal places If inflation increases by 3% and risk oversion increases by 1%, what is WC's required rate of return now? Do not round intermediate calculations. Round your answer to two decimal places