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Abnormal Return Definition and Quiz

A term used mostly in academia to refer to portfolios or strategies, so it requires a solid understanding of regression and performance measurement.

Define - Define abnormal returns.
Context - Use abnormal return in a sentence.
Quiz - Test yourself.

by Paul Alan Davis, CFA

Published: October 17, 2016

Updated: February 16, 2021

The term abnormal return has a different meaning to scholars and to those who create competing online finance dictionaries. Here we prefer the more nuanced and accurate academic definition.

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Abnormal Return

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Abnormal return is an academic term referring to the return that is different from expectations after taking into consideration all of the risks associated with the strategy. Risks can be derived using a single-factor CAPM approach or multi-factor APT model. The abnormal returns are those that differ from CAPM and APT-derived expected returns. Active managers seek positive abnormal returns, and scholars seek any statistically significant abnormal returns.

Synonym: exceptional return

For context, imagine testing a stock selection process over thousands of stocks over decades of history, measured monthly, and risk-adjusting all stock returns over all periods. That's how high the bar is set to publish results in an academic journal. Very few have the knowledge of statistics and the programming skills to accomplish this, so most investors jump right in an invest.

In a Sentence

Liz: At an initial client meeting last week, Guy gloated about our 5-year streak of positive abnormal returns..
Kim: Yeah, Mr. PhD knows a thing or two about being abnormal.

Video

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Quiz

Click box for answer.

Negative abnormal returns can be exploited by putting a negative sign in front of the alpha signal. | True or False?

True. Remember signals can be positively or negatively correlated.

Determining whether abnormal returns exist is a big part of the search for anomolies to the Efficient Market Hypothesis. | True or False?

True. Many scholars devote their professional lives to this search.

Questions or Comments?

Still unclear on abnormal returns? Try out the course Quant 101.

Related Terms

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