Wilson is now evaluating the expected performance of two common stocks, Furhman Labs Inc. and Garten Testing Inc. He has gathered the following information:
• The risk-free rate is 5%.
• The expected return on the market portfolio is 11.5%.
• The beta of Furhman stock is 1.5.
• The beta of Garten stock is .8.
Based on his own analysis, Wilson’s forecasts of the returns on the two stocks are 13.25% for Furhman stock and 11.25% for Garten stock. Calculate the required rate of return for Furhman Labs stock and for Garten Testing stock. Indicate whether each stock is undervalued, fairly valued, or overvalued.