Suppose that the expected return on the stock in the following table is 8%. Using a two-factor model, calculate the stock's return if the company-specific surprise for the year is 1.5%.

Explanation: The surprise in a factor equals actual value minus expected value. For the interest rate factor, the surprise was 2 percent; for the GDP factor, the surprise was -3 percent.

R = Expected return - 1.5(Interest rate surprise) + 2(GDP surprise) + Company-specific surprise = 8% - 1.5(2%) + 2(-3%) + 1.5% = 0.5%