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: REQUIRED RATE OF RETURN (Percent) 20.0 16.0 12.0 B.D 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 15 Value 20 ? 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.
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: REQUIRED RATE OF RETURN (Percent) 20.0 16.0 12.0 B.D 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 15 Value 20 ? 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.
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
Problem 1PS
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Transcribed Image Text: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:
REQUIRED RATE OF RETURN (Percent)
20.0
16.0
12.0
B.D
4.0
04
0
0.5
I
I
I
I
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
20
?
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.
Transcribed Image Text:Happy Corp.'s new required rate of return is
Tool tip: Mouse over the points on the graph to see their coordinates.
REQUIRED RATE OF RETURN (Percent)
20
16
12
8
0
0.4
0.8
1.2
RISK (Beta)
1.6
20
101
New SML
(?)
The SML helps determine the level of risk aversion among investors. The steeper the slope of the SML, the
the level of risk aversion.
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?)
O All stocks affected the same, regardless of beta
O Low-beta stocks
O High-beta stocks
O Medium-beta stocks
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