The security market line (SML) is an equation that shows the relationshyp between riak as measured by beta and the reptired rates of return on individual securities The SML equation is given below: Required return on Stock= Riak-free return + (Market risk premium) ( Stock's beta) If a stock's expected return plots on or above the 5ML, then the stock's return is below the SML the tock's return is to compensate the investor for risk. to compensate the investor for niske. If a stock's expected return plots The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML. ploted on a graph will shift up or down.parallei to the old SML If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming mare or less steep if investors become more or less nik overse, A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it useri Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WicE): n1=4%:R4=835;RPM=4%, and beta =1.3 What is WCE's required rate of return? Do not round intermediate calculations. Rlound your answer to two decimal places: If inflation increases by 2 Ws but there is ho change in itwestors' risk ayersion, what is wCE's required rate of retum now? Do not round intermediate calculations. Round your answer to two decimal places. Assume now that there is no change in inflation, but risk aversion ifcreases by 1%. What is WCE's required rate of return now? Do not round intermediate calculations. Round your answer to two decamal ploces. If inflation increases by. 2% and risk aversion increases by 1%, what is WCE s required rate of return now? Da not round intermedi ate caiculetions, Round your answer to two decimal places