Both portfolios A and B are well diversified and fairly priced, and their information is shown below. Suppose another portfolio C is well diversified with a beta of 1.5 and expected return of 15%.

A) Based on the CAPM model, is portfolio C overpriced or underpriced?

B) Design a zero-cost and zero-risk arbitrage strategy that exploits the mispricing of portfolio C. Assume you would buy or short sell $2000 of portfolio C.

C) Based on the arbitrage strategy you answered in the last question, compute the arbitrage

profit.

Portfolio E(r) Beta A 5% 0 B 13% 1.0