In the stock in the first question, and considering the CAPM to hold and be true..

• The risk-free rate is 2% and;
• The expected return on the market is 12%.
• A stock "A" has a beta of 1.5
• Stock "A" actually has a predicted return of 20%.

Construct an arbitrage portfolio to take advantage of the disequilibrium. (Note: This means the correct answer to the first question is not 20%!) Demonstrate how your portfolio gives you arbitrage profits (see Lecture C, or the practice problems after lecture C).