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 table that follows. REQUIRED RATE OF RETURN (Percent) Return on HC's Stock 0 0 1.0 RISK (Beta) Return on HC Slock REQUIRED RATE OF 0.5 RISK (Beta) CAPM Elements Risk-free rate (RF) 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 3.0% 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 ELIT. Happy Corp.'s new required rate of return is Tool tip: Mouse over the points in the graph to see their coordinates. 201 New SML REQUIRED RATE OF RETURN (Percent) 0.8 12 RISK (Beta) REQUIRED RATE OF RETURI 0.8 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 aversion? (In other words, which stocks see the biggest change in their required returns?) Medium-beta stocks High-beta stocks All stocks affected the same, regardless of beta Low-beta stocks CAPM Elements Value Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 2.2% 1.12% 8.0% An analyst believes that inflation is going to increa the Capital Asset Pricing Model (CAPM). The follow 2.0% P% over the next year, while the market plots the current SML. Calculate Happy Corp.'s new required return. Then, on the graph, use the green points (rectangle sy analyst's prediction. Happy Corp.'s new required rate of return is Tool tip: Mouse over the points in the graph to see their coordinates. New SML URN (Percent) CAPM Elements Value Risk-free rate (IRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 7.8% 10.8% An analyst believes that inflation is going to increa the Capital Asset Pricing Model (CAPM). The follow 4.5% over the next year, whi plots the current SML. 6.0% Calculate Happy Corp.'s new required return. Then) analyst's prediction. raph, use the green points Happy Corp.'s new required rate of return is Tool tip: Mouse over the points in the graph to see their coordinates. Value CAPM Elements Risk-free rate (IRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp, stock 6.8% An analyst believes that inflation is going to increa the Capital Asset Pricing Model (CAPM). The follow b% over the next year, while th h plots the current SML. 10% Calculate Happy Corp.'s new required return. Then 8.0% graph, use the green points (re analyst's prediction. 7.2% Happy Corp.'s new required rate of return is Tool tip: Mouse over the points in the graph to see their coordinates. Value CAPM Elements Risk-free rate (TRF) 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 3.0% over the next year, whi 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 analyst's prediction. Happy Corp.'s new required rate of return is 11.0% Tool tip: Mouse over the points in the graph r coordinates. 25.3% 7.7% 12.1% 20 New SML JRN (Percent)
