Tests of the efficient market hypothesis (EMH) are sometimes based on examining its abnormal rate of return. The abnormal rate of return is calculated by
A) subtracting the expected rate of return from the actual return, where the expected return is based on the stock's beta and the CAPM
B) subtracting the actual rate of return from the expected return, where the expected return is based on the stock's beta and the CAPM.
C) subtracting the expected rate of return from the actual return, where the expected return is based on the stock's projected dividend yields
D) subtracting the expected rate of return from the actual return, where the expected return is based on the stock's projected dividend yields.
E) adding the expected rate of return to the actual return, where the expected return is based on the stock's projected dividend yields.

Question

Quizplus · Accepted Answer

The abnormal rate of return is calculated by subtracting the expected rate of return from the actual return, where the expected return is based on the stock's beta and the CAPM. This measures how much better or worse a stock has performed compared to what was expected based on its level of risk. The EMH suggests that it is not possible to consistently achieve abnormal rate of return in the long run, as the market is efficient and all available information is already incorporated into the stock prices.

Tests of the Efficient Market Hypothesis (EMH) Are Sometimes Based