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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 E[]= E[2] = E[3] fj f3 The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets: A fa = = 0.05 + 1 + ZA fp = 0.02 +2 + @B = 0.085 0.5- &+ + Fz +c - where risks @a, , c are diversifiable/idiosyncratic. a) Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3? 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 E[]= E[2] = E[3] fj f3 The risk-free rate is rf = 2% = 0.02 and you are given the multi-factor representation of three risky assets: A fa = = 0.05 + 1 + ZA fp = 0.02 +2 + @B = 0.085 0.5- &+ + Fz +c - where risks @a, , c are diversifiable/idiosyncratic. a) Assume the 3-factor Arbitrage Pricing Theory applies. What are the risk-premia for holding factors 1,2,3