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Ms Mitrika an analyst at Aasheesh Securities Ltd. is considering the stocks of Aftek Ltd. And Paraan Ltd. For investment. Expected returns on these stocks
Ms Mitrika an analyst at Aasheesh Securities Ltd. is considering the stocks of Aftek Ltd. And Paraan Ltd. For investment. Expected returns on these stocks depend on the growth rate GDP. The conditional returns of the market and the stocks are given below: Probability Economic Scenario GDP growth rate Return on market % Return on (%) Aftek Ltd. Paraan Ltd. 9 25 14 15 7 0.18 0.24 11 1.00 - 3.00% 3.00 - 6.00% 6.00 - 8.00% More than 8.00% 0.26 38 27 18 0.32 46 33 25 The expected risk-free return is 6.5% Assume that CAPM holds well in the market You are required to i) Calculate the ex-ante-betas for the two stocks. ii) Find out whether the stocks of Aftek Ltd. And Paraan Ltd. Are underpriced or overpriced. iii) Calculate the proportion of systematic risk and unsystematic risk for both the companies. iv) Determine which stock the analyst would suggest to invest
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