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. For graph see image 13a CAPM Elements Value Risk-free rate (rRFRF) Market risk premium (RPMM) 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 _____?. For grapgh see image 13b The SML helps determine the level of risk aversion among investors. The steeper the slope of the SML, the higher or lower 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?) High-beta stocks Medium-beta stocks All stocks affected the same, regardless of beta
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. For graph see image 13a CAPM Elements Value Risk-free rate (rRFRF) Market risk premium (RPMM) 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 _____?. For grapgh see image 13b The SML helps determine the level of risk aversion among investors. The steeper the slope of the SML, the higher or lower 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?) High-beta stocks Medium-beta stocks All stocks affected the same, regardless of beta
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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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.
For graph see image 13a
|
CAPM Elements
|
Value
|
|---|---|
| Risk-free rate (rRFRF) | |
| Market risk premium (RPMM) | |
| Happy Corp. stock’s beta | |
| Required |
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 _____?.
For grapgh see image 13b
The SML helps determine the level of risk aversion among investors. The steeper the slope of the SML, the higher or lower 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?)
High-beta stocks
Medium-beta stocks
All stocks affected the same, regardless of beta
Low-beta stocks
Transcribed Image Text:(?
20.0
16.0
1.2, 10.4
HC's Stock
12.0
8.0
4.0
->
0.5
1.0
1.5
2.0
RISK (Beta)
REQUIRED RATE OF RETURN (Percent)
Transcribed Image Text:?)
20
New SML
16
12
0.4
0.8
1.2
1.6
2.0
RISK (Beta)
REQUIRED RATE OF RETURN (Percent)
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