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is almost full Save space by optimizing storage Ch 08: Assignment - Risk and Rates of Return 11. Changes to the security market line 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: 20.0 18.0 120 REQUIRED RATE OF RETURN (Percent) Return on HC's Stock 8.0 4.0 15 20 1.0 RISK (Beta) Value CAPM Elements Risk-free rate (RF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 9 An analyst belleves that inflation is going to increase by 3.0% over the next year, while the market ris 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 retum. Then, on the graph, use the green points (rectangle symbols) to pice the new SML suggested by this analyst's prediction 2 Happy Corp.s new required rate of return is Tool tip: Mouse over the points on the graph to see their coordinates ? 20 New SML 10 UIRED RATE OF RETURN (Percent) Ch 08: Assignment - Risk and Rates of Return Manage X . 20 - 16 New SML 2 12 REQUIRED RATE OF RETURN (Percent) 8 04 08 12 RISK (beta) The slope of the SML The SML helps determine the risk-aversion level among investors. The higher the level of risk version, the Which of the following statements best describes a shift in the SML caused by increased risk aversion? The risk-free rate will decrease The risk-free rate will remain constant. The risk-free rate will increase MacBook Pro

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