drop down options:

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 16.0 12.0 REQUIRED RATE OF RETURN(Percent) Return on HC's Stock 8.0 4.0 0.5 1.5 2.0 1.0 RISK(Beta) CAPM Elements Value Risk-free rate (RF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock An analyst believes that inflation is going to increase by 3.0% 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.'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 return is Tool tip: Mouse over the points on the graph to see their coordinates. ? 20.0 New SML 16.0 12.0 REQUIRED RATE OF RETURN (Percent) 8.0 4.0 0 0 0.4 1.6 2.0 0.8 1.2 RISK(Beta) The SML helps determine the level of risk aversion among investors. The steeper the slope of the SML, the the level of risk aversion. Which kind of stock is most affected by changes in risk aversion? (In other words, which stocks see the biggest change in their required returns?) O Low-beta stocks O All stocks affected the same, regardless of beta O Medium-beta stocks O High-beta stocks Value CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) 2.0% Happy Corp. stock's beta Required rate of return on Happy Corp. stock 2.2% 1.1% An analyst believes that inflation is going to increa b% over the Capital Asset Pricing Model (CAPM). The follow 8.0% plots th --- Market risk premium (RPM) Happy Corp. stock's beta 6.0% Required rate of return on Happy Corp. stock 10.8% An analyst believes that inflation is going to increa % over the 7.8% the Capital Asset Pricing Model (CAPM). The followi plots the c 4.5% Calculate Happy Corp.'s new required return. Then raph, use t analyst's prediction. Happy Corp. stock's beta Required rate of return on Happy Corp. stock 2.3 An analyst believes that inflation is going to increa 1.6 % over the the Capital Asset Pricing Model (CAPM). The followi h plots the 1.0 Calculate Happy Corp.'s new required return. Then graph, use 0.3 analyst's prediction. Happy Corp.'s new required rate of return is CAPM Elements Value 7.7% Tool tip: Mouse over the points on the graph eir coordi 11.0% Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 25.3% 12.1% 20.0 6.8% An analyst believes that inflation is going to increa % over then the Capital Asset Pricing Model (CAPM). The followi 10.0% plots the cur f Calculate Happy Corp.'s new required return. Then 8.0% raph, use the analyst's prediction. 7.2% The steeper the slope of the SML, the Happy Corp.'s new required rate of return is other words, which stocks see the big the level of risk aversion. higher ge in their required returns?) lower