Hi can you please answer these questions it will be dearly appreciated :) The fo

Question

Hi can you please answer these questions it will be dearly appreciated :)

The following graph plots the current 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 20.0 6.0 Return on HC's Stock 12.0 8.0 4.0 0.0 0.5 1.0 1.5 2.0 RISK (Beta) CAPM Elements Value Risk-free rate (rRF) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp. stock

Explanation / Answer

Part 1: Risk free rate = 4%

Required rate of return on Happy Corp. stock = 10%

Happy Corp.'s stock beta = 1.25

Market risk premium = (10% - 4%) / 1.25

= 4.8%

Part 2: Happy Corp.'s new required rate of return = 4% + 1.25 * (4.8% + 2%)

= 12.5%

Part 3: The higher the level of risk aversion, the steeper the slope of the SML.

Part 4: The SML would be a horizontal line.

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