REQUIRED RATE OF RETURN (Percent) 16.0 tates of ReturnT 12.0 1.2, 10.4 Return on HC's Stock...

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REQUIRED RATE OF RETURN (Percent) 16.0 tates of ReturnT 12.0 1.2, 10.4 Return on HC's Stock REQUIRED RATE OF RETURN (Percent) 40 0 0.5 1.0 1.5 2.0 RISK (Beta) CAPM Elements Risk-free rate (IRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock Value 10.4% 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 Tool tip: Mouse over the points on the graph to see their coordinates. 20 0 0 08 1.2 1.6 2.0 RISK (Beta) New SML ? The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML. REQUIRED RATE OF RETURN (Percent) 16.0 tates of ReturnT 12.0 1.2, 10.4 Return on HC's Stock REQUIRED RATE OF RETURN (Percent) 40 0 0.5 1.0 1.5 2.0 RISK (Beta) CAPM Elements Risk-free rate (IRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock Value 10.4% 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 Tool tip: Mouse over the points on the graph to see their coordinates. 20 0 0 08 1.2 1.6 2.0 RISK (Beta) New SML ? The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML.