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Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten...

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4.3 percent, the expected return on the market is 10.4 percent, and the betas of the two stocks are 1.3 and 0.9, respectively. Stevens’s own forecasts of the returns on the two stocks are 10.40 percent for Furhman Labs and 10.50 percent for Garten.

a. Calculate the required return for each stock.

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Answer #1

As per CAPM Model,

Required Rate = Rf + Beta(Rm - Rf)

For, Furhman Labs,

Required Rate = 0.043 + 1.30(0.104 - 0.043)

Required Rate = 12.23%

For, Garten Testing Inc,

Required Rate = 0.043 + 0.90(0.104 - 0.043)

Required Rate = 9.79%

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