4. John Wilson is a portfolio manager at Austin & Associates. He is evaluating the expected performance of two shares, 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, Wilsons forecasts of the returns on the two stocks are 13.25% for Furhman stock and 11.25% for Garten stock.

1. 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.
2. Which share has an expected positive alpha and which has an expected negative alpha?
3. Which of these shares should John recommend to his clients?
4. Provide two reasons for what might be the source of a positive alpha.