What Does Abnormal Return Mean
Is the difference between the expected return of a security and the actual return. Used to describe the returns generated by a given security or portfolio over a period of time that is different from the expected rate of return.
AbnormalReturn = ActualReturn − NormalReturn
The expected rate of return is the estimated return based on an asset pricing model, using a long run historical average or multiple valuations.
For example
If a MSFT stock increased by 10% because of some news which affected the stock price, but the average market only increased by 6%, then the abnormal return was 4% (10% – 6% = 4%). If the market average performs better than the individual stock then the abnormal return will be negative i.e stock by 6% and average market by10%, then abnormal return will be -4.
