Answer: 0.017

## Explanation The regression equation is: WPO = -3.2% + 0.49 × (S&P 500) Given forecasted S&P 500 excess returns = 10% = 0.10 **Calculation:** WPO = -3.2% + 0.49 × 10% = -3.2% + 4.9% = 1.7% Convert 1.7% to decimal: 1.7% = 0.017 **Verification:** - -3.2% = -0.032 - 0.49 × 0.10 = 0.049 - Sum = -0.032 + 0.049 = 0.017 Therefore, the predicted value of WPO excess returns is 0.017 (option A). **Why other options are incorrect:** - B (0.12): This would be 12%, which is too high - C (0.17): This would be 17%, which is incorrect - D (0.0017): This would be 0.17%, which is too low

Author: Nikitesh Somanthe