Earning an abnormal return, also known as an excess return or abnormal profit, is difficult for a number of reasons.
One reason is that the market is generally efficient, meaning that prices reflect all available information and any deviations from the expected return are likely to be corrected quickly. This means that it can be difficult to earn abnormal returns by simply buying undervalued assets or selling overvalued assets, as the market will tend to adjust to reflect the true value of the asset.
Another reason is that competition among investors is fierce, with many investors seeking to earn abnormal returns. This competition can make it difficult to identify mispriced assets or opportunities to earn abnormal returns, as other investors may have already identified and acted on these opportunities.
A third reason is that earning abnormal returns often requires taking on additional risk. For example, an investor may need to invest in less liquid or less well-known assets in order to earn abnormal returns. These assets may be more volatile and less predictable, which can increase the risk of losing money.
In addition, earning abnormal returns may require investing in assets or strategies that are not well understood or that are outside of an investor’s area of expertise. This can increase the risk of making poor investment decisions or of being caught off guard by unexpected events.
Overall, earning abnormal returns is difficult due to the efficiency of the market, the fierce competition among investors, and the additional risk that may be required to earn abnormal returns. While it is possible to earn abnormal returns in some cases, it is not easy and requires careful analysis, risk management, and a willingness to take on additional risk.
Summary
Earning an abnormal return, or excess return is difficult due to the efficiency of the market, the fierce competition among investors, and the additional risk that may be required to earn abnormal returns.
The market tends to be efficient, meaning that prices reflect all available information, and any deviations from the expected return are likely to be corrected quickly. This makes it difficult to earn abnormal returns by simply buying undervalued assets or selling overvalued assets.
In addition, competition among investors can make it difficult to identify mispriced assets or opportunities to earn abnormal returns, and investing in assets or strategies that are not well understood or that are outside of an investor’s area of expertise can increase the risk of making poor investment decisions. Overall, earning abnormal returns requires careful analysis, risk management, and a willingness to take on additional risk.