## Answer

There are three steps to calculating equity risk premia.

Step 1: Get the risk premia 𝛾_{𝑗,𝑡 }from market prices:

Step 2: Estimate the price 𝜆_{𝑘,,𝑡 }of each risk factor given the factor exposures 𝛽_{𝑗,𝑘,𝑡} of each transaction.

Step 3: Apply factor prices (lambdas) to new assets to compute their risk premia given their factor exposures.