Module 5 Bonus Problem Set The following graph plots the current security market line (SM) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the grach, complete the table that follows: Tools Tips Tips bols REQURED RATE OF RETURN Porce ramon Sock roductory 1 1 RISK Value CAPM Elements Risk-free rate (rap) 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 SMI suggested by this analyst's prediction Happy Corp's new required rate of return is Module 20 New SML REQUIRED RATE OF RETURN (Percent) 014 15 20 12 RISK (Beta) cory The SML helps determine the risk-aversion level among investors. The steeper the slope of the SML, the the level of risk aversion Which of the following statements best describes the shape of the SML if investors were not at all risk averse? The SML would have a positive slope, but the slope would be flatter than it would be if investors were risk averse. The SML would have a negative slope. The SML would have a positive slope, but the slope would be steeper than it would be it investors were risk averse. The SML would be a horizontal line