For this question, and the next one (assume that the one-factor CAPM holds...)

A portfolio (D) has a beta = 1.1 while the market expected return is 25% and short-term treasury bills (perceived to be risk-free) have a return of 5%. If the expected return on Portfolio D is 26%:

Is the stock Over Priced, or Under Priced? Should the stock be Bought or Sold? Explain (i.e., demonstrate why using the CAPM formula).

For this question, and the previous one (assume that the one-factor CAPM holds...)

A portfolio (D) has a beta = 1.1 while the market expected return is 25% and short-term treasury bills (perceived to be risk-free) have a return of 5%. If the expected return on Portfolio D is 26%:

Given that it was suggested in the first question that this was not priced at equilibrium, Construct a portfolio consisting of the Portfolio D, the Market, and the T-Bills (as above) which would take advantage of the arbitrage situation, and demonstrate that the conditions for arbitrage are met.