Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the riskfree rate so that there is no arbitrage? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) Question 6 (CAPM 1pt) Suppose that you believe that CAPM holds in reality. The expected return on the market portfolio is 10%. The yield on the Treasury bill is 1%. Among the following stocks, which one is overpriced (negative ) according to the CAPM? Use the Treasury bill rate as the risk free rate. 1. Stock A with expected return =10% and market beta =1.2 2. Stock B with expected return =11% and market beta =0.9 3. Stock C with expected return =9% and market beta =0.8 4. Stock D with expected return =20% and market beta =1.5