Utilizing Abnormal Returns to Determine a Stock's Performance

- 26 January 2022 16:23 WIB
A stock order book and price chart.  ((Unsplash/Austin Distel))
A stock order book and price chart. ((Unsplash/Austin Distel))

JAKARTADAILY.ID – An abnormal return is a substantial loss or profit that investors or portfolio managers experienced over a certain period. It can vary depending on the type of investment and the expected return.

Returns that are abnormal may be fraudulent, or they may simply point to something more nefarious. However, do not confuse abnormal returns with "alpha" or excess returns.

An abnormal return is a measure that shows how well the security or portfolio performed relative to the market or a benchmark index. It can also help investors identify the manager's skill and compensation level.

An abnormal return summarizes how the actual returns from a given fund differ from the expected returns. It can be either a positive or negative figure. So, actually earning 30 percent from a mutual fund which is expected to only yield a 10 percent return per year, creates a positive figure of 20 percent, and vice versa.

The cumulative abnormal return (CAR) is the total of all returns occurring in a given period. It's computed once after several days. This method avoids generating bias in the results as it only takes a small time window to generate it.

The cumulative abnormal return measures the effect of various events on the stock price. It is commonly used to analyze the various asset pricing models.

The capital asset pricing model (CAPM) is another variable that portfolio managers use with an abnormal return to determine a stock or security's performance is the capital asset pricing model (CAPM). It is a framework that calculates a security's expected return based on various assumptions. It assumes that the expected return includes the expected volatility of the returns and the expected market return.

Read More: What You Need to Know About Net Asset Value in Investment

Editor: Suksmajati Kumara

Source: Investopedia

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