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:

ROEi = 4 + 1.8 GOi + εi.Both variables are stated in percentages, so a GO observation of 5 percent is included as 5.





Question


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