Abnormal Return

An abnormal return is one that differs from the expected return on an investment.

Over a particular time period, an abnormal return reflects the exceptionally significant profits or losses achieved by a certain investment or portfolio. The performance deviates from the expected or anticipated rate of return (RoR) of the investments—the predicted risk-adjusted return based on an asset pricing model, a long-run historical average, or various valuation approaches.

The occurrence of atypical returns, whether positive or negative in direction, assists investors in determining risk-adjusted performance.

Abnormal returns may simply be unusual, or they may indicate something more sinister, such as fraud or manipulation.

Abnormal returns might occur by chance, as a result of an external or unplanned incident, or as a result of bad actors.

A cumulative abnormal return (CAR) is the sum of all abnormal returns, and it can be used to assess the impact of lawsuits, buyouts, and other events on stock prices.

When compared to the entire market or a benchmark index, abnormal returns are critical in establishing a security's or portfolio's risk-adjusted performance. Abnormal returns may aid in determining a portfolio manager's skill on a risk-adjusted basis. It will also show if investors were adequately compensated for the level of investment risk they assumed.