What Is an Abnormal Return?

An abnormal return describes the unusually large profits or losses generated by a given investment or portfolio over a specified period. The performance diverges from the investments' expected, or anticipated, 澳洲幸运5开奖号码历史查询:rate of return (RoR)—the estimated risk-adjusted return based on an asset pricing model, or using a long-run historical average or multiple⛄ valuation techniques.

Returns that are abnormal may simply be anomalous or they may point to something more nefarious such as fraud or manipulation. Abnormal returns should not be confused with "alpha" or 澳洲幸运5开奖号码历史查询:excess returns earned by actively managed investments.

Understanding Abnormal Returns

Abnormal returns are essential in determining a security or portfolio's 澳洲幸运5开奖号码历史查询:risk-adjusted performance when compared to the overall market or a 澳洲幸运5开奖号码历史查询:benchmark index. Abnormal returns could𓆉 help to identify a portfolio manager's skill on a risk-adjusted basis. It will also illustrate whether investors received adequate compensation for the amount of investment risk assumed.

An abnormal return can be either positive or negative. The figure is merely a summary of how the actual returns differ from the predicted yield. For example, earning 30% in a 澳洲幸运5开奖号码历史查询:mutual fund that is expected to average 10% per year would create a positive abnormal return of 20%. If, on the other hand, in this same example, the 澳洲幸运5开奖号码历史查询:actual return was 5%♈, thi✤s would generate a negative abnormal return of 5%.

Cumulative Abnormal Return (CAR)

Cumulative abnormal return (CAR) is the total of all abnormal returns. Usually, the calculation of cumulative abnormal return happens over a small window of time, often only days. This short duration is because that compounding daily abnormal returns can cre༺ate bias in the results.

Cumulative abnormal return (CAR) is used to measure the effect lawsuits, buyouts, and other eve🍃nts have on stock prices and is also useful for determining the accuracy of asset pricing models in predicting the expected performance.

The 澳洲幸运5开奖号码历史查询:capital asset pricing model (CAPM) is a framework used to calculate a security or portfolio's expected return based on the 澳洲幸运5开奖号码历史查询:risk-free rate of return, beta, and the expected market return. After the calculaꦦtion of a security or portfolio's expected return, the estimate for the abnormal return is calculated by subtracting the expected return from the realized return.

Example of Abnormal Returns

An investor holds a 澳洲幸运5开奖号码历史查询:portfolio of securities and wishes to calculate the pꦆortfolio's abnormal return during the previous year. Assume that th𓄧e risk-free rate of return is 2% and the benchmark index has an expected return of 15%.

The investor's portfolio returned 25% and had a beta of 1.25 when measured against the benchmark index. Therefore, given the amount of ris💙k assumed, the portfolio should have returned 18.25%, or (2% + 1.25 x (15% - 2%)). Consequently, the abnormal return during the previous year was 6.75% or 25 - 18.25%.

The same calculations can be helpful for a stock holding. For example, stock ABC returned 9% and had a beta of 2, when measured against its benchmark index. Consider that the risk-free rate of return is 5% and the benchmark index has an expected return of 12%. Based on the CAPM, stock ABC has an expected return of 19%. Therefore, stock ABC had an abnormal return of -10% and 澳洲幸运5开奖号码历史查询:underperformed the market during this period.