Actual Returns Returns 2009 10 12 2010 11 8 2011 -8-11 2012 -6 14 2013 28 7 21.

Question

Actual Returns Returns 2009 10 12 2010 11 8 2011 -8-11 2012 -6 14 2013 28 7 21. CAPM (L03, CFA2) Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4 percent, the expected retum on the market is 11.5 percent, and the betas of the two stocks are 1.2 and.9, respectively Stevens's own forecasts of the returns on the two stocks are 13.75 percent for Furhman Labs and 10.50 percent for Garten. Calculate the required return for each stock. Is each stock undervalued. fairly valued, or overvalued? Problem 22. Caleulating Beta (CFAI) You are given the followi ng information concerning a stock and the Returns YearMarket Stock 2008 2009 2010 2011-14 21 2012 013 18% 34% 27 12 37 16 15 d the stock. Next, calculate

Explanation / Answer

21.

F’s stock:

Expected rate = Risk-free rate + beta × (Required rate – Risk-free rate)

11.5%              = 4% + 1.2 × (Required rate – 4%)

6.25% = Required rate – 4%

Required rate = 10.25%

Answer: The required rate of return is 10.25%.

Answer: Since the required rate (10.25%) is smaller than the expected rate (11.5%), the stock is undervalued.

G’s stock:

Expected rate = Risk-free rate + beta × (Required rate – Risk-free rate)

11.5%              = 4% + 0.9 × (Required rate – 4%)

8.33% = Required rate – 4%

Required rate = 12.33%

Answer: The required rate of return is 12.33%.

Answer: Since the required rate (12.33%) is higher than the expected rate (11.5%), the stock is overvalued.

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