The following graph plots the current 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 follows:   00.51.01.52.020.016.012.08.04.00REQUIRED RATE OF RETURN (Percent)RISK (Beta)Return on HC's Stock   CAPM Elements Value Risk-free rate (rRFrRF)      Market risk premium (RPMRPM)      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 coordinates.   New SML00.40.81.21.62.0201612840REQUIRED RATE OF RETURN (Percent)RISK (Beta)   The SML helps determine the level of risk aversion among investors. The higher the level of risk aversion, the    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?) Medium-beta stocks   High-beta stocks   All stocks affected the same, regardless of beta   Low-beta stocks

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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The following graph plots the current 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 follows:
 
00.51.01.52.020.016.012.08.04.00REQUIRED RATE OF RETURN (Percent)RISK (Beta)Return on HC's Stock
 
CAPM Elements
Value
Risk-free rate (rRFrRF)     
Market risk premium (RPMRPM)     
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 coordinates.
 
New SML00.40.81.21.62.0201612840REQUIRED RATE OF RETURN (Percent)RISK (Beta)
 
The SML helps determine the level of risk aversion among investors. The higher the level of risk aversion, the    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?)
Medium-beta stocks
 
High-beta stocks
 
All stocks affected the same, regardless of beta
 
Low-beta stocks
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