MindTop Inp Assignment 08-Risk and Rates of Return O Due Today at 11 PM EDT The

Question

MindTop Inp Assignment 08-Risk and Rates of Return O Due Today at 11 PM EDT The following graph plots the current SML and indicates the return that investors require from holding stock f 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 CT1.0, 8.0 8.0 0.0 0.5 1.0 1.5 2.0 RISK IBetal CAPM Elements Value Risk-free rate (rar) Market risk premium (RPM) Happy Corp. stock's beta Required rte of return on 2.0% L . 17 2 3 4 5

Explanation / Answer

a) Required rate of return= Rf+beta*MRP

Rf=risk free rate=2%

Reqd rate of return=8%

beta=1

hence MRP=(8-2)/1=6%

b) New required rate= (1+0.08)/(1+0.03) -1=4.85%

C) Flatter the slope lower the level of risk aversion

d)high beta stocks are the most affected. The higher beta stocks are more risky investments. When investors become risk averse, those are the ones they would tend to move out of first.

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