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 +

*where risks , , are diversifiable/idiosyncratic.

Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3???