The following graph plots the current security market line $($SML$)$ and $$ndicates the return that investors require from holding stock from Happy Corp.

$(HC).$ Based on the graph, complete the table that follows.

CAPM Elements

ValueCAPM Elements

Risk$-$free rate $(r_{RF})$

Market risk premium $(R{P}_M).$

Happy Corp. stock's beta

Required rate of return on Happy Corp. stock

Value

$q,$

$$

$q,$

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 carrent 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 $$The SML helps determine the level of risk aversion among investors. The higher the level of risk aversion, the steeper the slope of the SML$.$ 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?$)$

Low$-$beta stocks

Medium$-$beta stocks

High$-$beta stocks

All stocks affected the same, regardless of beta