Abnormal Return

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Written By SmarterrMoney.org

The latest in personal finance to help you make smarter money choices. 

Abnormal Return: Definition, Examples, and Insights

Abnormal return is when your return deviates from the expected return. It can be positive or negative.

Abnormal return is when your return deviates from the expected return. It can be positive or negative. Abnormal returns can be produced by chance, or as a result of bad actors.

These returns are not the same as excess returns, which are returns achieved above the return of a proxy.

Abnormal Return Explained

An abnormal return refers to the earnings on an investment that goes above or below what was originally expected.

It’s the difference between the actual return and the expected return, considering the investment’s performance and the overall market or similar investments.

Imagine the market progressing at a steady rate, and you predict your investment will follow suit. If your investment suddenly leaps forward or unexpectedly falls behind, that’s where the abnormal return comes into play.

The concept can be applied to individual stocks, portfolios, or various investment strategies. It’s a multifaceted tool, reflecting the complexity and unpredictability of the market landscape.

Here are some key insights:

  • An abnormal return doesn’t necessarily mean that your investment decision was correct or incorrect. It’s a comparison tool to measure performance against expectations.
  • Abnormal returns often come with risks. High positive abnormal returns might be the result of high-risk investment strategies.
  • Understanding abnormal returns can assist in evaluating your investment’s performance relative to the market or other comparable investments.
  • Market conditions, economic indicators, company performance, and even global events can influence abnormal returns.

An Example of Abnormal Return

Let’s dive into a tangible example to better understand the concept of abnormal return.

Imagine you invest in a particular technology stock, expecting it to follow the market’s average return of 10% over a year.

You base this expectation on industry analysis, historical performance, and general market trends. It’s a well-reasoned assumption.

Accrued Revenue is an accounting term that refers to revenue that has been earned but not yet received in cash.

You’ve essentially hit the investment jackpot, achieving more than what was anticipated. This scenario shows how abnormal returns can lead to pleasant surprises.

Accrued Revenue is an accounting term that refers to revenue that has been earned but not yet received in cash.

The above examples illustrate the twofold nature of abnormal returns. It’s neither inherently good nor bad but serves as a barometer for assessing how your investment fared against expectations.

These snapshots of success and setbacks in the investment world underline the importance of careful planning and continual monitoring.

Abnormal returns aren’t just numbers; they tell a story about market forces, investment acumen, and sometimes, the wild card of luck.


What is an abnormal return?

An abnormal return is the difference between the actual return of an investment and the expected return, given the market or similar investments’ performance. It can be either positive or negative, reflecting how the investment fared against expectations.

Is a positive abnormal return always good?

Not necessarily. A positive abnormal return might indicate a successful investment strategy, but it could also be a sign of higher risks taken. Context, risk tolerance, and alignment with investment goals are essential considerations.

Can I consistently achieve abnormal returns?

Consistently achieving abnormal returns is challenging, as markets are influenced by various unpredictable factors. The Efficient Market Hypothesis argues that it’s nearly impossible to consistently outperform the market.

How can I calculate an abnormal return?

Abnormal return can be calculated by subtracting the expected return (based on market or similar investments) from the actual return of the investment. It’s a straightforward yet profound metric that provides insights into investment performance.

Does a negative abnormal return mean a loss?

Not always. A negative abnormal return means the investment performed worse than expected, not necessarily that it resulted in a loss. It could still be profitable but less so than anticipated.