The residual in the case of a GO of 8 percent and an observed ROE of 21 percent is closest to:

A. −1.8 percent.

B. 2.6 percent.

C. 12.0 percent.

An analyst has estimated a model that regresses a company’s return on equity (ROE) against its growth opportunities (GO), defined as the company’s three-year compounded annual growth rate in sales, over 20 years, and produces the following estimated simple linear regression:

ROE_i = 4 + 1.8 GO_i + ε_i.

Both variables are stated in percentages, so a GO observation of 5 percent is included as 5.