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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 on the graph, complete the table that follows: 20,0 160 120 Return on HC's Stock 1 - 1 -- 1 REQUIRED RATE OF RETURN (Percent 20 05 10 RISK (B) o Nd ch Value CAPM Elements Risk-free rate (T) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 2.8% 10.4% 5.5% An analyst believes that inflation is going to increa over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The follow 5.0% 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 retums Tooltip: Mouse over the points on the graph to see the coordinates New SML rch CAPM Elements Value Risk-free rate (TR) Market nsk premium (RPM) Happy Corp. stock's beta 3.4 Required rate of return on Happy Corp. stock 5.99 An analyst believes that inflation is going to increa 0% over the next year, while the market risk premium will be unchanged. The analyst uses 8.1% the Capital Asset Pricing Model (CAPM). The follow plots the current SML. 4.5% Calculate Happy Corp.'s new required return. Then braph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction Happy Corp's new required rate of retum is Tooltip: Mouse over the points on the graph to see their coordinates New SML RETURN (Percent Value CAPM Elements Risk-free rate (Rp) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp, stock 2.8 An analyst believes that inflation is going to increa 0.3 % over the next year, while the market risk premium will be unchanged. The analyst wes the Capital Asset Pricing Model (CAPM). The follow plots the current SML 1.9 Calculate Happy Corp's new required retum. Then graphy use the green points (rectangle symbols) to plot the new SML suggested by this 1.2 analyst's prediction Happy Corp's new required rate of return is Tooltip: Mouse over the points on the graph to see their coordinates. New SML 0 Tch Value CAPM Elements Risk-free rate (TR) Market risk premium (RPM) Happy Corp, stock's beta Required rate of return on Happy Corp. stock 10.4% An analyst believes that inflation is going to increa over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The follow 8.8% plots the current SML Calculate Happy Corp's new required return. Then 9.4% yaph, use the green points (rectangle symbols) to plot the new SML suggested by thus analyst's prediction 13.0% Happy Corp.'s new required rate of return is Tooltip: Mouse over the points on the graph to see their coordinates 20 Now SML RETURN Percent N 0 o arch Tool tip: Mouse over the points on the graph to see their coordinates. ? -O 16 New SML 12 REQURED RATE OF RETURN (Percent) 8 04 16 20 1.2 RISK (Beta) the slope of the SML The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the Which of the following statements best describes the shape of the SML of investors were not at all risk averse? 12 REQUIRED RATE OF RETURN (PE 04 1.6 20 0.8 12 RISK (Beta) The SML helps determine the risk aversion level smong investors. The higher the level of risk aversion, the the slope of the SML flatter Which of the following statements best describes the shape of the SML i investors were not at all risk avers steeper The SML would be a horizontal line The SML would have a negative slope. The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse. The SML would have a positive slope, but the slope would be flotter than it would be if investors were risk averse Grade It Now Save & Continue Continue without saving 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: 20,0 160 120 Return on HC's Stock 1 - 1 -- 1 REQUIRED RATE OF RETURN (Percent 20 05 10 RISK (B) o Nd ch Value CAPM Elements Risk-free rate (T) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 2.8% 10.4% 5.5% An analyst believes that inflation is going to increa over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The follow 5.0% 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 retums Tooltip: Mouse over the points on the graph to see the coordinates New SML rch CAPM Elements Value Risk-free rate (TR) Market nsk premium (RPM) Happy Corp. stock's beta 3.4 Required rate of return on Happy Corp. stock 5.99 An analyst believes that inflation is going to increa 0% over the next year, while the market risk premium will be unchanged. The analyst uses 8.1% the Capital Asset Pricing Model (CAPM). The follow plots the current SML. 4.5% Calculate Happy Corp.'s new required return. Then braph, use the green points (rectangle symbols) to plot the new SML suggested by this analyst's prediction Happy Corp's new required rate of retum is Tooltip: Mouse over the points on the graph to see their coordinates New SML RETURN (Percent Value CAPM Elements Risk-free rate (Rp) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp, stock 2.8 An analyst believes that inflation is going to increa 0.3 % over the next year, while the market risk premium will be unchanged. The analyst wes the Capital Asset Pricing Model (CAPM). The follow plots the current SML 1.9 Calculate Happy Corp's new required retum. Then graphy use the green points (rectangle symbols) to plot the new SML suggested by this 1.2 analyst's prediction Happy Corp's new required rate of return is Tooltip: Mouse over the points on the graph to see their coordinates. New SML 0 Tch Value CAPM Elements Risk-free rate (TR) Market risk premium (RPM) Happy Corp, stock's beta Required rate of return on Happy Corp. stock 10.4% An analyst believes that inflation is going to increa over the next year, while the market risk premium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The follow 8.8% plots the current SML Calculate Happy Corp's new required return. Then 9.4% yaph, use the green points (rectangle symbols) to plot the new SML suggested by thus analyst's prediction 13.0% Happy Corp.'s new required rate of return is Tooltip: Mouse over the points on the graph to see their coordinates 20 Now SML RETURN Percent N 0 o arch Tool tip: Mouse over the points on the graph to see their coordinates. ? -O 16 New SML 12 REQURED RATE OF RETURN (Percent) 8 04 16 20 1.2 RISK (Beta) the slope of the SML The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the Which of the following statements best describes the shape of the SML of investors were not at all risk averse? 12 REQUIRED RATE OF RETURN (PE 04 1.6 20 0.8 12 RISK (Beta) The SML helps determine the risk aversion level smong investors. The higher the level of risk aversion, the the slope of the SML flatter Which of the following statements best describes the shape of the SML i investors were not at all risk avers steeper The SML would be a horizontal line The SML would have a negative slope. The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse. The SML would have a positive slope, but the slope would be flotter than it would be if investors were risk averse Grade It Now Save & Continue Continue without saving

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