Abnormal Return

Abnormal Return

The difference between the expected return and the actual return on an investment. An abnormal return may be either positive or negative; indeed, an abnormal return may be negative even if the actual return is positive. For example, suppose the expected return on an investment is 7% and the actual return is 5%. While the investor has 5% more than he/she had when he/she started, the abnormal return is still -2%. On the other hand, if the expected return is 5% and the actual return is 9%, then there is a positive abnormal return of 4%. One may calculate the abnormal return to gauge the accuracy of various asset pricing models.