Assume the assumptions of Arbitrage Pricing Theory hold and a three-factor model describes the realized returns. All other risk is diversifiable. Assume that factors are normalized so that

[1] = [2] = [3]

The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets:

= 0.05 + 1 +

= 0.02 1 + 2 +

= 0.085 0.5 1 + 2 + 3 + C

*risk are diversifiable/idiosyncratic.

Assume the 3-factor Arbitrage Pricing Theory applies. What is the expected return of an asset that has loading 0.75 on factor 1, 0.2 on factor 2, and -0.4 on factor 3?