question archive The following graph plots the current Security Market Line (SML) and indicates the return that investors require from holding stock from Happy Corp
The following graph plots the current Security Market Line (SML) and indicates the return that investors require from holding stock from Happy Corp
Subject:FinancePrice:2.85 Bought3
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 0F RETURN (Percent) 20.0 16.0 12.0 Return on HC's Stock 8.0 4.0 0.0 0.5 1.0 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
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Risk-free rate = 4%
Market Risk-Premium = Market Return - Risk-Free Rate = 10% - 4% = 6%
Beta = 0.6
Required Rate = 7.6% (4% + 0.6 x 6%)
New Required Rate = 6% + 0.6 x 6% = 9.6%
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High-beta stocks experience more changes as they are more risky than the overall market.
