The following graph plots the current SML and indicates the return that investor

Question

The following graph plots the current SML and indicates the return that investors require from holding stock fromm Happy Corp. (HC). Based on the graph, complete the table that follows REQUIRED RATE OF RETURN (Percent 20.0 16.0 Return on HC's Stock 8.0--D 4.0 0.0 1.5 RISK (Betal CAPM Elements Value Risk-free rate (rRF) 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 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 coordinaters.

Explanation / Answer

Facts Given in the Problem:

As per Capital Assest Pricing Model,

Required return = Risk Free Return + Beta X Market risk premium

                           = 4% + 2 X 4%

                           = 12%

Therefore, Required return of Happy Corp. Stock is 12%

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