Index Model Arbitrage Suppose that an analyst has estimated the following index model for a security from excess returns: Ri = i + i RM + ei and has found that i = 0.03 and i =0.5. The total standard deviation for the security is i = 10%, and that of the market is also M = 10%. a. (3 points) What is the firm-specific risk 2 (ei); that is, the variance of ei? b. (3 points) Suppose you construct a portfolio that is long $2 of security i for every dollar it is short the index. What is the beta of that portfolio? What is the expected percentage return of that portfolio? What is the term used to describe the generation of returns in this fashion? c. (3 points) What is the standard deviation of the portfolio you have constructed? Because calculators are not allowed, you may present your answer in (unsimplifed) square root form for full credit, but do be clear about units. d. (3 points) Critically evaluate the following statement: The portfolio constructed in this question has no risk. Your answer should be no more than three sentences long.