Rebecca is now asked to evaluate the expected performance of two common stocks, clients are interested in: Furla Inc. and Gardner Inc. She has collected the following information: The risk-free rate is 5%. The expected return on the market portfolio is 11.5%. The beta of Furla stock is 1.5. The beta of Gardner stock is 0.8. Based on her own analysis, Rebeccas forecasts of the returns on the two stocks are 13.25% for Furla stock and 11.25% for Gardner stock.

1. What is the equilibrium required rate of return for Furla stock and for Gardner stock in the Rebecca analysis?
2. b. Show whether each stock is undervalued, fairly valued, or overvalued.

Explain your answer fully. (Calculation is required. Please show all steps)

In the context of the CAPM, Rebecca needs to provide investment recommendations to the clients who are considering stocks Furla and Gardner as potential investment.

1. Identify and justify which of the two stocks should Rebecca recommend as to be the most appropriate for the investors who want to add this stock to a well-diversified equity portfolio?
2. Define the Diversification Strategy and explain its power and limitation.