I hope that the solution is complete and clear and the drawing Be in numbers and

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I hope that the solution is complete and clear and the drawing Be in numbers and clear

Chrome ia.com/af/servlet/quiz?quiz action takeQuiz&quiz; probGuid-QNAPCOA8010100000041ebc550060000&ictx-ream-0057;&ck-r; Risk and Rates of Return Graded Assignment | Read Chapter 8 | Back to Assignment Due Friday 06.29.18 at 11 Attempts: 4 Keep the Highest: 48 3. 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 20.0 16.0 12.0 Return on HC's Stock 1.0 RISK (Betal CAPM Elements Value Risk-free rate (rar) Market risk premium (RPM) Happy Corp. stock's beta Required rate of return on Happy Corp, stock F3 F4 F5 F6 F9 F10 F11 F12 Prt F2 8 2 4 5 8 9 0 6

Explanation / Answer

a) Risk free rate Rf = 2.00% The risk-free rate or beta of zero is located at the y- intercept. b) Market Risk Premium = Expected Market Return - Rf = 8% -2% = 6.00% The rate of return or beta of one is located at the X- intercept less risk free rate c) HC's Beta 1 d) HC's required rate of return = 8.00% given 2) Required Rate of Return = Rf + Beta x (Rm - Rf) Required Rate of Return = (2% + 3%+ 1 x 6%) 11.00% The risk-free rate consists of two elements: a real risk-free rate of return and an in?ation premium. Under the conditions given above, the real risk-free rate does not change, the rate of in?ation increases by 3.0%, and the market risk premium (MRP) remains unchanged. 3) The flatter the slope of the SML, the lower the level of risk aversion 4) The SML would plot as a horizontal line. If investors were not at all risk averse, there would be no risk premium. In that case, the SML would plot as a horizontal line

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