Question

Ch 08: Assignment-Risk and Rates of Return 8. 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. REQUIRED RATE OF RETURN (Percent) Return on HC's Stock RISK (Beta) Value CAPM Elements Risk-free rate (rry) Market risk premium (RPM)

Answer 1

rate positively ..

ans 1
	Based on graph -
	risk free rate =		4%
	Market risk premium =		6.67%	=(8%-4%)/0.6
	Stock beta =		0.6
	required rate =		8%
ans 2
	New required rate of return
	infation will effect risk free rate, market risk premium will remain same
	therefore required rate =
	=4%+2%+(6.67%*0.6)
	10.00%
	Therefore answer =	10.00%
ans 3
	Higher the level of risk aversion the STEEPER the solpe of the SML, the
ans 4	Correct answer is option : High-beta stock