ABNORMAL RETURN Meaning and
Definition
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Abnormal return, often referred to as excess return, is a financial concept used to determine the performance of an investment or asset relative to its expected or normal rate of return. It is a measure of the deviation in returns from the average or expected returns.
Abnormal return is calculated by subtracting the expected return, which is typically the average return of a benchmark or a comparative group of investments, from the actual return earned on a specific investment over a given time period. This calculation helps to isolate and measure the impact of specific factors that may have contributed to above or below average performance.
Abnormal returns can be positive or negative. Positive abnormal returns indicate that an investment outperformed its expected or typical returns during a specific time period, while negative abnormal returns indicate underperformance.
Investors and analysts use abnormal return as a performance indicator to evaluate the effectiveness of investment strategies, the skill of fund managers, or the impact of news events or market events on the performance of individual investments or portfolios. It is a widely used measure in the field of finance for assessing the value created or destroyed by investment decisions.
Overall, abnormal return helps to provide insights into the relative performance and success of investments, allowing investors to make informed decisions about their portfolios.
Etymology of ABNORMAL RETURN
The word "abnormal" is derived from the Latin word "abnormis", which is a combination of "ab" (meaning "away from") and "norma" (meaning "rule" or "pattern"). "Abnormal" refers to something that deviates or strays from the usual or expected norm.
The term "return" comes from the Old French word "retorner", which ultimately stems from the Latin word "re-" (meaning "back") and "tornare" (meaning "to turn"). In finance and investment, "return" generally refers to the gain or loss on an investment or portfolio.
Therefore, the term "abnormal return" in finance refers to a return on an investment that deviates significantly from what is considered normal or expected. It could indicate positive or negative deviations from the average or benchmark returns.
