Question

The COVID19 pandemic has had a significant impact on the stock market. Some stocks have experienced significant decline in prices, while the 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 to stock trading and has insufficient knowledge of financial analysis. He knows that you are studying an investment analysis unit. He approaches 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.

Stock	Annual Return	Beta
A	11	1.20
B	9	1.10
C	13	1.25
D	12	0.90

[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 you need to make your recommendations

Answer 1