One-year risk-free bills may be purchased at 10 and offer a 10% return.

The market portfolio has an expected return of 20% over one year. Shares in the market portfolio sell at 100.

Shares in asset X with a beta value of 1.3 may be purchased for 100. This particular asset is forecast to return 50% over 1 year.

(a) Asset X is mispriced. Explain why.

(b) (i) Devise a strategy to exploit the mispricing of asset X. (ii) Illustrate the cash flows arising from this strategy.