1) Landon Stevens is evaluating the expected performance of two common stocks, F

Question

1)

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.9 percent, the expected return on the market is 13.6 percent, and the betas of the two stocks are 2.1 and .7, respectively. Stevens’s own forecasts of the returns on the two stocks are 25.00 percent for Furhman Labs and 11.90 percent for Garten.

Calculate the required return for each stock.

2)A stock has a beta of 1.2 and an expected return of 11.6 percent. If the risk-free rate is 5.1 percent, what is the market risk premium?

Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 5.9 percent, the expected return on the market is 13.6 percent, and the betas of the two stocks are 2.1 and .7, respectively. Stevens’s own forecasts of the returns on the two stocks are 25.00 percent for Furhman Labs and 11.90 percent for Garten.

Explanation / Answer

Required Return of Stockss :

Furhman Labs = 5.9+2.1(13.6-5.9) = 19.07%

Garten Testing = 5.9+0.7(13.6-5.9) = 11.29%

2) Market Risk Premium

11.6= 5.1 + 1.2* Market Risk Premium

= Market Risk Premium = (11.6-5.1)/1.2

=> Market Risk Premium = 5.416%

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