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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

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:

image text in transcribed

image text in transcribed

An analyst believes that inflation is going to increase by 2.80% 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 rectangle symbols to plot the new SML suggested by this analysts prediction.

Happy Corp.s new required rate of return is ?

image text in transcribed

REQUIRED RATE OF RETURN (Percent) 0.5 1.5 20 1.0 RISK (Beta) Value CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock New SML REQUIRED RATE OF RETURN (Percent) 0 0.4 0.8 1.2 RISK (Beta) 1.8 2.0

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