Landon Stevens is evaluating the expected performance of two common stocks, Furh

Question

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 6.0 percent, the expected return on the market is 13.8 percent, and the betas of the two stocks are 2.2 and .8, respectively. Stevens’s own forecasts of the returns on the two stocks are 25.20 percent for Furhman Labs and 12.00 percent for Garten.

1. Calculate the required return for each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Furhman Labs _________%

Garten Testing _________%

Explanation / Answer

rf 6 rm 13.8 beta 2.2,.8 required return for each stock =rf+beta(Rm-rf) Furhman Labs Garten Testing required return   =6+2.2*(13.8-6) 23.16% required return   =6+.8*(13.8-6) 12.24%

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