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Point is on: 1.2, 10.4

Risk-free rate options: 2.8%, 5.0%, 10.4%, 5.5%

Market risk premium options: 4.5%, 5.9%, 3.4%, 8.1%

Happy Corp. stock's beta options: 0.3, 1.2, 1.9, 2.8

Required rate of return on Happy Corp. stock options: 10.4%, 8.8%, 9.4%, 13.0%

Happy Corp.'s new required rate of return options: 13.6%, 8.7%, 12.4%, 28.5%

The higher the level of risk aversion, the (Flatter, Steeper) the slope of the SML.

11. Changes to the security market line 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: ? 20.0 16.0 12.0 Return on HC's Stock 8.0 4.0 C 0.5 1.0 1.5 2,0 RISK (Beta) REQUIRED RATE OF RETURN (Percent) 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 coordinates. ? 20 New SML 16 12 8 0 2.0 1.6 1.2 0.8 0.4 RISK (Beta) REQUIRED RATE OF RETURN (Percent) the slope of the SML The SML helps determine the risk-aversion level among investors. The higher the level of risk aversion, the Which of the following statements best describes a shift in the SML caused by increased risk aversion? The risk-free rate will increase. The risk-free rate will remain constant. The risk-free rate will decrease

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