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 following table that follows.

An analyst belives that inflation is going to increase by 3.0% over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Assest 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.

200 160 120 REQUIRED RATE OF RETURN (Percent) Return on HC's Stock 80 1 1 40 1 05 15 20 10 RISK (Beta) Value CAPM Elements Risk-free rate (ru) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock o An analyst believes that inflation is going to increase by 3.0% over the next year, while the market risk premium will be unchanged. The analyses 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 New SML 16 REQUIRED RATE OF RETURN(Percent) 08 20 12 16 The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the the slope of the SML. Which of the following statements best describes the shape of the SM. if investors were not at all risk averse? The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse. The SML would be a horizontal line. The SML would have a positive slope, but the slope would be flotter than it would be if investors were risk averse, The SML would have a negative slope