Question

The unexpected or "surprise" return component of actual returns is comprised solely of bad news:

Answer 1

Solution:

The return of security can be attributed to two factors- Expected return and unexpected return

Total return = Unexpected return + Expected return

In the long-run, the unexpected return tends to be zero and the total return will be equal to the expected return.

Explanation of unexpected return-

Suppose we are expecting that the company will post 25% growth in net income but so the return will have already factored this but when the company posts 100% growth then the unexpected return will be high. This news is good news and not bad news. Hence the statement that the unexpected or "surprise" return component of actual returns is comprised solely of bad news is not correct.