Abnormal return, also known as abnormal profit or excess return, refers to the excess return of investment above or below the expected return. It is a measure of the performance of an investment or portfolio relative to what would have been expected based on the level of risk and the overall market conditions.
In finance, the expected return of an investment is the return that is predicted based on factors such as the level of risk associated with the investment, the overall market conditions, and the historical returns of similar investments. The expected return is often used as a benchmark against which the actual performance of an investment can be measured.
For example, if an investment is expected to return 10% per year based on the level of risk and the market conditions, and it actually returns 15% per year, the abnormal return would be 5%. This excess return may be due to a variety of factors, such as unexpected changes in market conditions or the performance of the investment exceeding expectations.
Abnormal return is often used in academic studies and by financial analysts to evaluate the performance of an investment or portfolio. It can be calculated by subtracting the expected return from the actual return on the investment.
Positive abnormal returns indicate that the investment performed better than expected, while negative abnormal returns indicate that the investment performed worse than expected.
There are a number of factors that can affect abnormal returns, including market conditions, the performance of the investment or portfolio, and changes in the level of risk associated with the investment.
For example, if an investment is expected to return 10% per year based on the level of risk and the market conditions, but the market conditions change unexpectedly and the investment returns 15% per year, the abnormal return would be 5%.
In addition to being used to evaluate the performance of individual investments or portfolios, abnormal returns can also be used to assess the performance of investment managers or fund managers. By comparing the abnormal return of a particular investment or portfolio to the expected return, it is possible to determine whether the investment manager or fund manager has added value through their investment decisions.
Overall, abnormal return is an important measure of the performance of an investment or portfolio, as it allows investors and analysts to determine whether an investment has performed better or worse than expected based on the level of risk and the overall market conditions. It can be a useful tool for evaluating the performance of individual investments or portfolios, as well as for assessing the performance of investment managers and fund managers.