Question

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 0.6, 7.6 Return on HC's Stock 8.0 4.0 0 0.5 1.0 1.5 2.0 RISK (Beta) REQUIRED RATE OF RETURN (Percent)

Answer 1

rate positively ..

ans 1
	Based on graph -
	risk free rate =		4%
	Market risk premium =		6.7%	=(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