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Abnormal Return

An abnormal return is the difference between the actual return on an investment and the expected return based on the overall market or a particular benchmark. Abnormal returns can be positive or negative and are often analyzed to assess the impact of specific events on a stock’s performance.

Example

Suppose a pharmaceutical company announces the approval of a new drug by the FDA, and its stock price jumps by 15% in a single day while the overall market increases by only 2%. The difference, 13%, represents the abnormal return, suggesting that the market had not fully anticipated the approval, and the stock’s price adjustment reflects the new information’s value.

Key points

• Indicates performance that differs from expected norms based on historical data or benchmarks.

• Used to assess the market impact of events like earnings reports, mergers, or regulatory changes.

• Positive returns suggest better-than-expected performance; negative returns indicate underperformance.

Quick Answers to Curious Questions

They reveal how specific events impact a stock's performance beyond expectations, helping assess if a security is over- or undervalued and aiding in investment decisions.

Unexpected events like earnings surprises, major announcements, mergers, or shifts in market sentiment can cause abnormal returns.

Term: Abnormal Return