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

New SML00.40.81.21.62.0201612840REQUIRED RATE OF RETURN (Percent)RISK (Beta)

The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, thesteeper the slope of the SML.

Which of the following statements best describes a shift in the SML caused by increased risk aversion?

The risk-free rate will remain constant.

The risk-free rate will increase.

The risk-free rate will decrease.

12.0 REQUIRED RATE OF RETURN (Perce Return on HC's Stock 8.0 40 0 0 05 15 20 1.0 RISK (Beta) Value 2.0% CAPM Elements Risk-free rate (RP) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 6.0% 1.0 6.8% 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 11.0% Tool tip: Mouse over the points on the graph to see their coordinates. 20 New SML 16 2 REQUIRED RATE OF RETURN (Percent) 0 0.4 1.6 20 0.8 1.2 RISK (Beta) The SML. helps determine the risk-aversion level among investors. The higher the level of risk aversion, the steeper the slope of the SML. Which of the following statements best describes a shift in the SML caused by increased risk aversion? The risk-free rate will remain constant. The risk-free rate will increase. The risk-free rate will decrease. 12.0 REQUIRED RATE OF RETURN (Perce Return on HC's Stock 8.0 40 0 0 05 15 20 1.0 RISK (Beta) Value 2.0% CAPM Elements Risk-free rate (RP) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 6.0% 1.0 6.8% 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 11.0% Tool tip: Mouse over the points on the graph to see their coordinates. 20 New SML 16 2 REQUIRED RATE OF RETURN (Percent) 0 0.4 1.6 20 0.8 1.2 RISK (Beta) The SML. helps determine the risk-aversion level among investors. The higher the level of risk aversion, the steeper the slope of the SML. Which of the following statements best describes a shift in the SML caused by increased risk aversion? The risk-free rate will remain constant. The risk-free rate will increase. The risk-free rate will decrease