Abnormal Return is a term used to refer to the difference between the expected return of an asset and its actual return. It is typically calculated by taking the ratio of the abnormal returns over a period of time, usually one year, divided by the market risk-free rate. Abnormal returns are generally seen as either positive or negative depending on whether they exceed or fall short of what was expected.
Positive abnormal returns occur when an asset’s actual performance exceeds expectations, while negative abnormal returns occur when it does not meet them. This measure can be useful for investors who want to make informed decisions about which assets have good potential for generating high yields with minimal risk. For example, if an investor has identified a stock that consistently produces higher than average returns compared to other similar stocks in its industry then it may be worth investing in because it has demonstrated above average performance compared to its peers and therefore presents less risk than other options available in that sector.
The calculation of abnormal return is often complicated as there are many factors such as economic conditions and movements within financial markets that need to be taken into consideration in order to accurately determine this figure. In addition, different types of investments require different approaches when calculating their respective abnormal returns; these include cash flows from stocks and bonds, dividend income from mutual funds, capital gains distributions from exchange traded funds (ETFs), etc.. As such it is important for investors seeking out these investments understand how each type should be analyzed before making any decisions based upon this metric alone.
