Abnormal return refers to the difference between an investment’s actual return and its expected return over a specific period. Unlike regular returns, abnormal returns can be significantly higher or lower, often resulting from unexpected market events, corporate actions, or external shocks.
📊 Why Abnormal Return Matters
- Helps evaluate portfolio performance against the market.
- Assesses whether investors are fairly compensated for the risks they take.
- Identifies the impact of external factors, such as earnings reports or social media activity, on stock prices.
🔎 How to Calculate Abnormal Return
📌 Formula:
Abnormal Return = Actual Return – Expected Return
For example:
✅ A mutual fund expected to return 12% but achieving 26% has an abnormal return of +14%.
❌ If it only returns 3%, the abnormal return is -9%.
⚡ Key Concepts:
✔ Cumulative Abnormal Return (CAR): The sum of abnormal returns over time, useful for analyzing trends.
✔ Capital Asset Pricing Model (CAPM): A method to determine expected returns by considering market risk.
🚀 Real-World Examples
📉 Tesla (TSLA) saw trading halts in 2018 after Elon Musk’s tweet about taking the company private.
📉 Spotify (SPOT) experienced a stock drop in early 2020 due to higher-than-expected losses.
Abnormal returns are a powerful tool for investors, helping them understand risk-adjusted performance and market anomalies. Have you ever encountered an investment with an abnormal return? Share your insights below! 👇💬