Question: CAPM Elements Value Risk-free rate ( r RF ) 5.00% Market risk premium ( RP M ) 4.50% Happy Corp. stocks beta 1.2 Required rate

CAPM Elements	Value
Risk-free rate (rRF

)	5.00%
Market risk premium (RPM

)	4.50%
Happy Corp. stocks beta	1.2
Required rate of return on Happy Corp. stock	10.40%

An analyst believes that inflation is going to increase by 2.40% 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 . CAPM Elements Value Risk-free rate (rRF ) 5.00% Market risk premium

? 20 New SML 16 REQUIRED RATE OF RETURN (Percent) 0 0.4 1.6 2.0 0.8 1.2 RISK (Beta)

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