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.

An analyst believes that inflation is going to increase by $2\mathrm{.}0\%$ 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.$\text{'}$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.$\text{'}$s new required rate of return is

Tool tip: Mouse over the points in the graph to see their coordinates.

High$-$beta stocks

Low$-$beta stocks

Medium$-$beta stocks