a. Mr. Anderson invested AU$200,000 in stock market in December 2019. He purchased 5,000 shares of ABC Company at AU$40 per share. Expected rate of return on ABC stock and S&P/ASX300 were 14% and 12% respectively at the time of purchase. The rate on T-bill issued by Reserve Bank of Australia (RBA) was 4% in December 2019.

Mr. Andrew, neighbour of Mr. Anderson, claims that he is smarter than Mr. Anderson in stock market trading. He also invested AUD$200,000 in the shares of XYZ Company, which had an expected rate of return of 16%. Both Mr. Anderson and Mr. Andrew enjoy the same risk-free rate and market return (return on S&P/ASX300). Use CAPM to answer this question (assume both shares are fairly priced).

(i)Who invested in the riskier share? Without any calculation explain your answer in words.

(ii)Now explain your answer in (a) above with numerical calculation (you must show all relevant workings)

b. COVID19 pandemic has significant impact on stock market. Some stocks experience significant decline in prices, while prices of some stocks show upward momentum. Investors are continuously keeping their eyes on stock market to find mis-priced stocks. One of your neighbours is new in stock trading and has insufficient knowledge in financial analysis. He knows that you are studying investment analysis unit. So, he approached you with the following data and seeks your help to make investment decisions.

Stock

Actual return (%)

Beta

Market risk premium and risk-free rates are 6% and 4% respectively.

[i] Which model will you use for your analysis and why?

[ii] What will be your recommendations regarding these four stocks? You must show all relevant numerical calculations for each stock you need to make your recommendations