AAR and CAAR are two measures used in financial analysis to assess the performance of a security or portfolio. Both AAR and CAAR are calculated over a specific period of time and are used to compare the actual return of a security or portfolio to its expected return.
AAR, or average abnormal return, is the average return of a security or portfolio over a certain period of time that is above or below the expected return. It is calculated by taking the difference between the actual return and the expected return and then dividing that value by the number of periods in the analysis.
For example, if security had an expected return of 5% per year and an actual return of 8% over a three-year period, its AAR would be (8%-5%)/3 = 1%.
CAAR, or cumulative abnormal return, is the cumulative sum of AARs over a certain period of time. It measures the overall performance of a security or portfolio above or below its expected return. For example, if security had AARs of 1%, 3%, and 2% over a three-year period, its CAAR would be 1% + 3% + 2% = 6%.
AAR and CAAR are often used to evaluate the performance of securities or portfolios relative to a benchmark or index and can be helpful in identifying trends and patterns in the data. They can be used to assess the impact of specific events, such as earnings announcements or changes in market conditions, on the performance of a security or portfolio.
One key difference between AAR and CAAR is that AAR is an average measure, while CAAR is a cumulative measure. AAR reflects the average return of a security or portfolio over a certain period of time, while CAAR reflects the overall performance of a security or portfolio over that same period of time.
Another difference between AAR and CAAR is the time period being analyzed. AAR is calculated over a specific period of time, such as a year or a quarter, while CAAR is the cumulative sum of AARs over a longer period of time, such as several years
Both AAR and CAAR are useful tools for financial analysts and investors, as they allow for the evaluation of the performance of a security or portfolio relative to its expected return. They can be used to identify trends and patterns in the data, and to assess the impact of specific events on the performance of a security or portfolio.
By comparing AAR and CAAR to a benchmark or index, analysts and investors can gain a better understanding of the performance of a security or portfolio over time, and make more informed investment decisions.