Stocks MKT SMB HML Coefficients IBM 1.2 1.0 CSCO 1.0 -2.0 -1.5 Risk Premiums 5% 2% 3% 2. Portfolio i's return is described by: ri-ry + A,m(rm-ry) + A,c(Tc-ry) +0.5%, where Tm is the return on the market index, Te is the return on the commodity index and r is the risk-free rate. (a) Construct a pure arbitrage trading using the market index, a commodity index, t-bills and portfolio:i (b) If you are $1 million long and S1 million short in your arbitrage trade. What will be your profit at the end of the period? (c) Now, assume there is no arbitrage in the market (so the alpha of portfolio i should be 0, not 0.5%). What is the expected return on portfolio i if the risk-free rate is 2%, the beta on the market is 1, the risk premium on the market is 5%, the beta on the commodity index is 2, and the risk premium on the commodity index is 3%? (d) Now assume portfolio i has some idiosyncratic risk (e.g., T-Bim m-r)+Bielre-i)+ 0.5% + ei, where ei is mean zero and has a variance of .025%). Can we construct a pure arbitrage strategy