Landon Stevens is evaluating the expected performance of two common stocks, Furhman Labs, Inc., and Garten Testing, Inc. The risk-free rate is 4.8 percent, the expected return on the market is 11.4 percent, and the betas of the two stocks are 1.8 and .8, respectively. Stevens’s own forecasts of the returns on the two stocks are 15.60 percent for Furhman Labs and 11.20 percent for Garten.
1. Calculate the required return for each stock.
2. Is each stock undervalued, fairly valued, or overvalued?