Explanation

Correct Answer: C

The model most likely has the ability to accommodate skewness and excess kurtosis in factor return data. The Student's t-distribution can capture fat tails (excess kurtosis) better than the normal distribution.

Analysis of Other Options:

• A: Incorrect - With limited historical data and complex models, estimation error is likely to be high, not low.
• B: Incorrect - While specification error could be present, the use of Student's t-distribution is actually a better specification choice than normal distribution for accommodating fat tails.

Key Points:

• Student's t-distribution can model excess kurtosis (fat tails)
• Limited historical data increases estimation error
• Complex models with many factors can suffer from overfitting with limited data