You are dealing with two stocks: Stock 1 and Stock 2. You have the following information about these two stocks:

₁ = 1.5

₂ = 0.25

oneyear_f =2

( )=10%

You also know that both stocks currently trade at 10. Assume that Stock 1 pays 1% dividend yield p.a., whereas Stock 2 pays no dividend. Assume that you will use the CAPM model.

a) Calculate the expected return on both stocks.

b) Calculate the one-year forward price for the two stocks.

c) Following your calculations in parts (a) and (b), do you think there is an opportunity for arbitrage? Why? Explain.