An abnormal return describes the unusually large profits or losses generated by a given investment or portfolio over a specified period. The performance diverges from the investments’ expected, or anticipated, rate of return (RoR)—the estimated risk-adjusted return based on an asset pricing model, or using a long-run historical average or multiple valuation techniques.
Returns that are abnormal may simply be anomalous or they may point to something more nefarious such as fraud or manipulation. Abnormal returns should not be confused with “alpha” or excess returns earned by actively managed investments.
- An abnormal return is one that deviates from an investment’s expected return.
- The presence of abnormal returns, which can be either positive or negative in direction, helps investors determine risk-adjusted performance.
- Abnormal returns can be produced by chance, due to some external or unforeseen event, or as the result of bad actors.
- A cumulative abnormal return (CAR) is the sum total of all abnormal returns and can be used to measure the effect lawsuits, buyouts, and other events have on stock prices.