The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rate securities. The SML equation is given below: Required return on Stock Risk-free return + (Market risk premium) (Stock's beta) W If a stock's expected return plots on or above the SML, then the stock's return is -Select- expected return plots below the SML, the stock's return is-select- to compensate the investor for r to compensate the investor for risk. The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shi the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if invo less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and amount of debt it uses. Quantitative Problem: You are given the following information for Wine and Cork Enterprises (WCE): TRF-4%; TM 8% ; RPM = 4%, and beta = 1.2 What is WCE's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places. % If inflation increases by 2% but there is no change in investors' risk aversion, what is WCE's required rate of return now? Do no calculations. Round your answer to two decimal places. % Assume now that there is no change in inflation, but risk aversion increases by 1 What is WCE's required rate of return now? intermediate calculations. Round your answer to two decimal places