11. Changes to the security market line The following graph pats the curent sear

Question

11. Changes to the security market line The following graph pats the curent searty market Ine (SML) and indicatts the return th holding stock from Happy Orp pc. B ed on the graph, complete the table th follows. restos require from CAPM Elements Risk-free rater) Market risk premium (RPw) Happy Corp. stadk's bats Required rate of reburn on Happy Corp. stad An analyst believes tat nation is going to increase by 2.0% over the next year, "hile the market risk premium wil be unchanged. The analyst??the Capital Asset Pricing Model ?CAPM) The following graph pats the cumt SML Cacuate Happy Corp.'s new required reburn. Then, on the graph, use the green points (rectangle symbob)to p at the new SML suggested by this anaysts predctian. Happy Corp.'s new requred rate of reburn Tool tip: Mouse over the polints on the graph to see their coord nates

Explanation / Answer

SML stands for Security Market line

Here Y Intercept is risk free rate of return ,Your image is not clear but seems to be 5 %

Slope shows Market risk premium,Your image is not clear but seems to be 4.5%

Stock Beta is 1.2 as per graph.

And required rate of return = risk free rate + stock beta* Market risk premium

which is = 5+1.2*4.5=10.4%

After conidering inflation and no change in risk premium the new required rate of return will increse by 2%.

i.e12.4%

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