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) None of the above

Question

Quizplus · Accepted Answer

The abnormal rate of return is calculated by subtracting the expected rate of return from the actual return. The expected return is based on the stock's beta and the CAPM. Choice A is the only option that correctly reflects this calculation.

Tests of the Efficient Market Hypothesis (EMH)are Sometimes Based on Examining