View History Bookmarks People Window Help Aplla: Student Questio The Following G

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View History Bookmarks People Window Help Aplla: Student Questio The Following Graph Plots The × X engage ? Secure l https://courses.aplia.com/at/serviet/quiz?quiz_action-takeQuiz&quiz-probGuid-QNAPCOA8010100000041ca26; The following graph plots the aurrent 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 fo lows. REQUIRED RATE OF RETURN [Percent 20.3 16.0 12.0 Return on IC's Stock 4.0 1.5 2.0 RiSK (Betal 0.0 51.0 CAPM Elements Value Risk-free rate (rar) 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 2.0% over the next be unchanged. The analyst uses the Capital Asset Pricing Model (CAPM)?The following graph plots the current SL 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. MacBook Air

Explanation / Answer

Risk Free rate = 4%

Market risk premium = 6% ( while analyzing the graph we observe this)

Beta = .6

Required rate of return = 7.6% ( we can observe it by graph as well as we can find using CAPM model)

Now the risk free rate = 6%

so the new required rate of return = 6% + .6*6% = 9.6%

The SML helps determine the level of risk aversion among investors. The flatter the slope of the SML, the lower the level of risk aversion.

The SML would be horizontal line.

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