Abnormal Returns

Abnormal Returns refer to the Returns on an investment that differ from the expected return based on its risk profile or market conditions. This measure is used to assess the performance of a security or portfolio against a Benchmark, often the market Index.

Abnormal Returns can be positive or negative. Positive abnormal Returns indicate that the investment has outperformed expectations, while negative abnormal Returns suggest underperformance.

Example 1: If a Stock is expected to yield a return of 8% based on historical data and market trends, but it actually Returns 12%, the abnormal return is 4% (12% – 8%).

Example 2: Conversely, if a Stock is expected to yield a return of 10% and instead Returns 5%, the abnormal return would be -5% (5% – 10%).

Case Study: A tech company reLeases a groundbreaking product, leading its Stock price to soar beyond market expectations. If the overall market was expected to rise by 5% but the company’s Stock rises by 15%, the abnormal return is 10% (15% – 5%). This can indicate strong demand and positive investor sentiment.