But there is also a spanish curse word, called: Caca Rica. Google translated it to "Rich Poop". Like the german word "Kaka" (a common word used by little boys).Number 3 is technically correct. Since Zelda was made in Japan, the name of the village seems to have remained intact from the original Japanese town -
カ カ リ コ
Ka Ka Ri Ko
If you know anything about the Japanese language, you'll know it's syllabary, which means that each base character is based on a syllable and not a single sound, always two.
Therefore, knowing how the language works, you can easily rule out that the Japanese would not pronounce it any other way than "Ka - Ka - Ri - Ko", written above in Katakana script.
The More You Know. :V