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 4.1 percent, the expected return on the market is 10.0 percent, and the betas of the two stocks are 1.1 and .7, respectively. Stevens’s own forecasts of the returns on the two stocks are 10.00 percent for Furhman Labs and 10.50 percent for Garten.

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.)

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4.1 percent, the expected return on the market is 10.0 percent, and the betas of the two stocks are 1.1 and .7, respectively. Stevens’s own forecasts of the returns on the two stocks are 10.00 percent for Furhman Labs and 10.50 percent for Garten.

Explanation / Answer

expected return Furhman = risk-free rate + beta * (expected return on the market - risk-free rate)

= 4.1 + 1.1*(10 - 4.1) = 10.59%

expected return Garten = risk-free rate + beta * (expected return on the market - risk-free rate)

= 4.1 + 0.7*(10 - 4.1) = 8.23%

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.