Consider two portfolios in a single factor world. Portfolio A has a beta of 0.1 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate is 10%.
A. Which portfolio is undervalued?
B. Assuming you have a weight on portfolio A of 2, provide weights for B and the risk free rate that generate a zero beta portfolio with sum of weights equal to 1 which we will call portfolio P.