Part A.) 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 berisk-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 beBoughtor Sold?Explain(i.e., demonstratewhyusing the CAPM formula).

Part B.) A portfolio (D) has a beta = 1.1 while the market expected return is 25% and short-term treasury bills (perceived to berisk-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(like we did for the Assignment!)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.