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) 20.0 16.0 12.0 Return on HC's Stock 8.0 4.0 0.0 0.5 1.0 1.5 2.0 RISK (Betal CAPM Elements Value Risk-free rate (FRF) 4.0% Market risk premium (RPM) 4.4% Happy Corp. stock's beta 2.2% Required rate of return on 7.6% Happy Corp. stock 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 cHgnested bu thic analuet's nrediction. 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) 20.0 16.0 12.0 Return on HC's Stock 8.0 4.0 0.0 0.5 1.0 1.5 2.0 RISK (Beta) CAPM Elements Value Risk-free rate (RF) Market risk premium (RPM) 7.8% Happy Corp. stock's beta 6.0% Required rate of return on 4.5% Happy Corp. stock 10.8% 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. 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) 20.0 16.0 12.0 Return on HC's Stock 8.0 4.0 0.0 0.5 1.0 1.5 2.0 RISK (Betal CAPM Elements Value Risk-free rate (rRr) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 1.4 0.2 1.0 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. 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) 20.0 16.0 12.0 Return on HC's Stock 8.0 4.0 0.0 0.5 1.0 1.5 2.0 RISK [Betal CAPM Elements Value Risk-free rate (rRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 9.5% 6.5% 6.8% 7.6% 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 analvst's prediction. e 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 22.1% 10.6% Tool tip: Mouse over the points on the graph dinates 6.7% 9.6% REQUIRED RATE OF RETURN (Percent) 20 New SML 16 8 4 0 0 0.0 2.0 1.2 1.6 0.4 0.8 Clear All RISK (Betal The SML helps determine the risk-aversion level among investors. The flatter the slope of the SML, the the level of risk aversion. Which of the following statements best describes the shape of the SML if investors were not at all risk averse? The SML would be a horizontal line. 12 12 4 0 0.8 0.0 0.4 1.2 1.6 2.0 Clear All RISK (Betal The SML helps determine the risk-aversion level among investors. The flatter the slope of the SML, the higher the level of risk aversion. lower Which of the following statements best describes the shape of the SML if investors were not at all risk averse? The SML would be a horizontal line. O The SML would have a negative slope. The SML would have a positive slope, but the slope would be flatter than it would be if investors were risk averse. The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse. 16 16 4 0.8 0.0 0.4 1.2 1.6 2.0 RISK (Betal Clear All The SML helps determine the risk-aversion level among investors. The flatter the slope of the SML, the higher the level of risk aversion. lower Which of the following statements best describes the shape of the SML if investors were not at all risk averse? The SML would be a horizontal line. O The SML would have a negative slope. The SML would have a positive slope, but the slope would be flatter than it wouldd be if investors were risk averse. The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse. 12
