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Suppose Oracle Corp. (ORCL) has sensitivity to market returns of 1.5, a small-minus big (SMB) factor sensitivity of 2, and a high-minus low book value
Suppose Oracle Corp. (ORCL) has sensitivity to market returns of 1.5, a small-minus big (SMB) factor sensitivity of 2, and a high-minus low book value (HML) factor sensitivity of 1.0. Furthermore, assume a risk-free rate of 3.5 percent, an average annual equity risk premium of 8.5 percent, average annual SMB factor return of 2.5 percent, and an average return to the HML factor of 4.5 percent. Calculate the abnormal return for ORCL during a year when it earned 15.25 percent assuming a three-factor model intercept of zero.
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