Explanation:
Based on the 2-factor model and the given firm-specific return of -2%, the expected return calculation would incorporate both systematic factors and the firm-specific component. The correct answer of 5.5% suggests that the model accounts for positive factor exposures that outweigh the negative firm-specific return, resulting in a net positive expected return.
Consequently, the firm-specific return is -2% during the period. Using the 2-factor model with the revised data, which of the following updated expected returns next year for BBC is correct?
A
1.5%
B
3.5%
C
5.5%
D
6.5%
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