Your are currently evaluating investment in stocks. The risk free rate is 5% and expected market return is 15%. You are considering investing in one of the following two stocks:

Stock A : Beta = 1.2, Expected Return (based on current prices) = 19%

Stock B : Beta = 1.8, Expected Return (based on current prices) = 21%

Using CAPM, determine if the stocks are fairly priced? If not, identify which stock is undervalued and which is overvalued

If the investor expects a share up move in the market, explain, giving reasons, how he can create an arbitrage strategy.