Abnormal Return
Abnormal Return refers to the portion of an investment portfolio or individual stock's actual return that exceeds or falls short of the expected return, typically used to assess investment performance or market reaction.
Definition: Abnormal return refers to the portion of an investment portfolio or individual stock's actual return that exceeds or falls short of the expected return. The expected return is usually based on market average returns, risk-adjusted returns, or other benchmark returns. Abnormal returns are often used to assess investment performance or market reactions.
Origin: The concept of abnormal returns originated from the Capital Asset Pricing Model (CAPM) and the Efficient Market Hypothesis (EMH) in finance. The CAPM model predicts the reasonable return of an asset based on the relationship between risk and expected return, while the EMH assumes that market prices have already reflected all available information, so any return exceeding expectations is considered abnormal.
Categories and Characteristics: Abnormal returns can be divided into positive abnormal returns and negative abnormal returns. Positive abnormal returns indicate that actual returns are higher than expected returns, often seen as a sign of successful investment; negative abnormal returns indicate that actual returns are lower than expected returns, possibly indicating issues with investment decisions. Characteristics of abnormal returns include: 1. Unpredictability: Due to the complexity and uncertainty of market information, abnormal returns are difficult to predict in advance. 2. Short-term fluctuations: Abnormal returns are usually short-term phenomena, and the market tends to balance out in the long run. 3. Information sensitivity: New information in the market (such as company earnings reports, economic data) is quickly reflected in prices, leading to abnormal returns.
Specific Cases: Case 1: A company releases a quarterly earnings report that exceeds market expectations, causing its stock price to surge in a short period, resulting in positive abnormal returns for investors. Case 2: A central bank unexpectedly announces an interest rate hike, which the market did not anticipate, leading to a general stock market decline and resulting in negative abnormal returns for investors.
Common Questions: 1. How to calculate abnormal returns? Typically, by subtracting the expected return from the actual return. 2. Are abnormal returns sustainable? Since the market tends to balance out, abnormal returns are usually short-term phenomena and difficult to sustain in the long term.
