tejas.gaikwad.1044
New member
Abnormal return is defined as the difference between the actual return and the expected return which can be attributed to the non-systematic influences. Abnormal returns may be positive or negative depending on the expected returns. Expected returns are primarily calculated by using of the asset pricing models like the CAPM model.
Abnormal returns are generally a consequence of certain events like mergers, dividend announcement, lawsuits etc.
In stock market trading, abnormal returns are the differences between a single stock or portfolio's performance and the expected return over a set period of time. Usually a broad index, such as the S&P 500 or a national index like the Nikkei 225, is used as a benchmark to determine the expected return.
Example 1:- if a stock increased by 5% because of some news which affected the stock price, but the average market only increased by 3% and the stock has a beta of 1, then the abnormal return was 2% (5% - 3% = 2%). If the market average performs better (after adjusting for beta) than the individual stock then the abnormal return will be negative.
Example 2:- Suppose that the expected returns on an investor’s portfolio of investments is 10% (which is generally measured using an index such as the S&P 500) while his actual return is only 6% then the abnormal return = -4%. On the other hand, if the actual return is 15%, abnormal return = 5%.
Abnormal returns are generally a consequence of certain events like mergers, dividend announcement, lawsuits etc.
Formula:
Abnormal Return = Actual Return-Expected Return
Abnormal Return = Actual Return-Expected Return
In stock market trading, abnormal returns are the differences between a single stock or portfolio's performance and the expected return over a set period of time. Usually a broad index, such as the S&P 500 or a national index like the Nikkei 225, is used as a benchmark to determine the expected return.
Example 1:- if a stock increased by 5% because of some news which affected the stock price, but the average market only increased by 3% and the stock has a beta of 1, then the abnormal return was 2% (5% - 3% = 2%). If the market average performs better (after adjusting for beta) than the individual stock then the abnormal return will be negative.
Example 2:- Suppose that the expected returns on an investor’s portfolio of investments is 10% (which is generally measured using an index such as the S&P 500) while his actual return is only 6% then the abnormal return = -4%. On the other hand, if the actual return is 15%, abnormal return = 5%.