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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.
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.
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True. Remember signals can be positively or negatively correlated.
True. Many scholars devote their professional lives to this search.
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