Sandratum TO REQUIRED RATE OF RETURN (Percent) Return on HC Stock HO 1 1 0 05 1.0 RISK (Beta) Value CAPM Elements Risk free rate Market nsk premium (0) Happy Corp, stock's beta Required rate of return on Happy Corp, stock An analyst believes that inflation is going to increase by 3.0% over the next year, while the market nisk 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 point in the graph to see their coordinates 20 Now SME REQUIRED RATE OF RETURN(Peter) 0 OH 15 20 12 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 oversion? (In other words, which stocks see the biggest change in their required returns Medium.beta stocks High-beta stocks Low beta stocks O All stocks affected the same, regardless of beta