Which of the following statements about the assumptions of efficient capital markets and the conclusion of the efficient market hypothesis is least accurate? A) Tests of market efficiency have found no strategy that produces excess returns above the market after accounting for transaction costs. B) If markets are efficient, investors should not trade often. C) In testing for semistrong-form market efficiency, researchers typically adjust for the stock’s risk. -------------------- The right answer is A - A is least accurate. This means the C is correct Could you please explain to me why researchers must adjust for the stock’s risk, and how they do that? Thanks in advance.
All of the forms of the Efficient Market Hypothesis refer to risk-sdjusted returns. I’d imagine that they probably just compute the Sharpe ratio of the investments, but there may be more sophisticated methods of adjusting the returns for risk that some researchers employ.
For what it’s worth, how they make the adjustments isn’t a Level I topic. (Nor is it a Level II nor a Level III topic.)
To become part of efficient frontier the stock should exhibit highest sharpe ratio. Sharpe ratio as one would know is a risk adjusted measure. We also know nobody can generate excess return because everybody holds combination of market portfoilo (which is in efficient frontier) and riskfree rate
This is true only if the portfolio includes the risk-free asset, in which case the efficient frontier is simply the CML.