NOTE: This is two parts of ONE question.

Consider the CAPM to hold and be true.. The risk-free rate is 2% and; The expected return on the market is 12%. What is the expected return on a stock with a beta of 1.5? Enter as a percentage, without the "%" Thus, 5% would be entered as "5" or "5.0" but not as "0.05" and not as "5%." 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)