You are asked to model the returns of the well$-$diversified portfolio $A,$ which may be impacted

by four factors: Market uncertainty, Expected Inflation, Industrial production, and Oil prices.

You calculate the following expected return and beta for each factor portfolio:

The risk free rate is $1\mathrm{.}5\%.$

Write the four$-$factor model equation, calculate the factor risk premiums, and the ex$-$

pected return on the well$-$diversified portfolio $A.$

Construct a competing portfolio $B$ that has the same risk profile as portfolio $A.$ Specify

individual weights in each of the risk factor portfolios. Calculate the expected return as

well as risk factor betas of the competing portfolio $B$ with respect to each risk factor.

Suppose that the observed return of portfolio $A$ is $12\mathrm{.}3\%.$ Construct a zero$-$investment

arbitrage strategy using portfolios A and $B.$ Calculate the profit from investing $$100,000$

in this strategy.