We talked about several factor models in our lecture videos. Suppose researchers identified two systematic factors that affect stockreturns: industry growth and changes in interest rates. Industry growth is expected to be3%, and interest rates are expected to increase by1%. You are looking at a potential stock with a beta of 1.2 on the industrial growth factor and 0.5 on the interest rate factor. Thestock's expected return is12%. What is your best guess of thestock's return, if industrial growth is actually5% and interest rates drop by2%?

A.

12%

B.

12.9%

C.

9.4%

D.

13.2%

E.

15.9%