Abnormal Return

Posted in Finance, Accounting and Economics Terms, Total Reads: 3623
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Definition: Abnormal Return

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.


Formula:

Abnormal Return = Actual Return-Expected Return


Example

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%.


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