The following graph plots the current security market line (SML) and indicates the retum that investors...

 

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The following graph plots the current security market line (SML) and indicates the retum that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. REQUIRED RATE OF RETURN (Percent) 20.0 16.0 12.0 Return on HC's Stack 8.0 4.0 0.0 0.5 1.0 1.5 2.0 RISK IBatal CAPM Elements Value Risk-free rate (er) Market risk prerniurm (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 9.5% 6.5% 6.8% 7.6% An analyst believes that inflation is going to increase by 2.0%a over the next year, while the market risk prernium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s neww required retum. 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 retum is Tool tip: Mouse over the points on the graph to see their coordinates. REQUIRED RATE OF RETURN IPercentl 20 New SML 16 12 0.0 04 0.8 1.2 1.6 2.0 RISK |Beta) Clear Ail The SML helps determine the risk-aversion level among investors. The flatter the slope of the SML, the the level of risk aversion. Which of the following statements best descrihes the shape of the SML If investors were not at all risk averse? O The SML would be a horizontal line. O The SML would have a negative slope. O The SML would have a positive slope, but the slope would be flatter than it would he if investors were risk averse. O The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse The following graph plots the current security market line (SML) and indicates the retum that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows. REQUIRED RATE OF RETURN (Percent) 20.0 16.0 12.0 Return on HC's Stack 8.0 4.0 0.0 0.5 1.0 1.5 2.0 RISK IBatal CAPM Elements Value Risk-free rate (er) Market risk prerniurm (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 9.5% 6.5% 6.8% 7.6% An analyst believes that inflation is going to increase by 2.0%a over the next year, while the market risk prernium will be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM). The following graph plots the current SML. Calculate Happy Corp.'s neww required retum. 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 retum is Tool tip: Mouse over the points on the graph to see their coordinates. REQUIRED RATE OF RETURN IPercentl 20 New SML 16 12 0.0 04 0.8 1.2 1.6 2.0 RISK |Beta) Clear Ail The SML helps determine the risk-aversion level among investors. The flatter the slope of the SML, the the level of risk aversion. Which of the following statements best descrihes the shape of the SML If investors were not at all risk averse? O The SML would be a horizontal line. O The SML would have a negative slope. O The SML would have a positive slope, but the slope would be flatter than it would he if investors were risk averse. O The SML would have a positive slope, but the slope would be steeper than it would be if investors were risk averse