RETURN (Percent) 20.0 16.0 12.0

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
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REQUIRED RATE OF RETURN (Percent)
20.0
16.0
12.0
8.0
4.0
0
0
0.5
Return on HC's Stock
1.0
RISK (Beta)
CAPM Elements
Risk-free rate (TRF)
Market risk premium (RPM)
Happy Corp. stock's beta
Required rate of return on Happy Corp. stock
1.5
Value
Happy Corp.'s new required rate of return is
2.0
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.
Transcribed Image Text:REQUIRED RATE OF RETURN (Percent) 20.0 16.0 12.0 8.0 4.0 0 0 0.5 Return on HC's Stock 1.0 RISK (Beta) CAPM Elements Risk-free rate (TRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock 1.5 Value Happy Corp.'s new required rate of return is 2.0 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.
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