An Analyst Has a Two-Factor Model to Forecast the Return

Multiple Choice

An analyst has a two-factor model to forecast the return for Security B: -2% + 4%(GDP) + 2.5%(IP) . You forecast GDP at 3% and IP at 2% with variances of 4% and 6% respectively. The covariance (GDP, IP) is .4, and the variance of Security B is 125. The variance of the random error term is

A) 9.8%.
B) 22.4%.
C) 17.1%.
D) 15.5%.