The real rate of return has been estimated to be 2 percent under current economic conditions. The 30-day risk-free rate (annualized) is 5 percent. Twenty-year U.S. government bonds currently yield 8 percent.
The yield on 20-year bonds issued by the Forester Hoop Company is 14 percent. Investors require an 18 percent return on Forester's common stock. The common stock of Brown's Forensic Products has a required return of 20 percent.
Compute and identify all meaningful risk premiums. What might account for the difference in the required returns for Brown versus Forester?