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In the stock in the first question, and c onsidering the CAPM to hold and be true.. The risk-free rate is 3% and; The expected

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

  • The risk-free rate is 3% 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).

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