The real risk-free 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 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?

To compute the risk premiums, we need to understand the components that contribute to the required returns for each investment.

Risk premiums are the additional returns that investors demand for taking on additional risk compared to a risk-free investment. In this case, the risk-free rate is considered to be 2 percent.

Let's calculate the risk premiums for each investment:

1. Risk Premium for the 30-day risk-free rate (annualized):
This can be calculated by subtracting the risk-free rate from the 30-day risk-free rate.
Risk Premium = 5% - 2% = 3%

2. Risk Premium for the 20-year U.S. government bonds:
This can be calculated by subtracting the risk-free rate from the yield on the 20-year U.S. government bonds.
Risk Premium = 8% - 2% = 6%

3. Risk Premium for the 20-year Forester Company bonds:
This can be calculated by subtracting the risk-free rate from the yield on the 20-year Forester Company bonds.
Risk Premium = 14% - 2% = 12%

4. Risk Premium for Forester's common stock:
This can be calculated by subtracting the risk-free rate from the required return on Forester's common stock.
Risk Premium = 18% - 2% = 16%

5. Risk Premium for Brown's Forensic Products common stock:
This can be calculated by subtracting the risk-free rate from the required return on Brown's common stock.
Risk Premium = 20% - 2% = 18%

Now, let's discuss what might account for the difference in the required returns for Brown versus Forester.

The required return on an investment is influenced by several factors including the perceived riskiness of the investment, market conditions, investor preferences, and expectations of future returns. In this case, the difference in required returns for Brown and Forester can be attributed to various factors such as:

1. Risk Perception: Investors may perceive Brown's Forensic Products common stock as riskier compared to Forester's common stock. This perception of higher risk could result from factors like the company's financial stability, growth prospects, industry volatility, or specific risks associated with Brown's operations.

2. Market Conditions: Market conditions play a significant role in determining required returns. If the market conditions are volatile or uncertain, investors may demand a higher return to compensate for the increased risk. It's possible that the market conditions are more favorable for Forester compared to Brown, leading to a lower required return for Forester.

3. Investor Preferences: Different investors have different risk tolerance levels and preferences. Some investors may be more risk-averse, while others may be willing to take on more risk in pursuit of higher returns. The varying required returns for Brown and Forester could reflect the different preferences and risk appetite of investors.

It's important to note that without more specific information about Brown and Forester, it's difficult to pinpoint the exact reasons for the difference in required returns. However, the factors mentioned above are common considerations that can influence the required returns for different investments.