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Abnormal return definition

A term used mostly in academia referring to portfolios or strategies so it requires a solid understanding of regression and performance measurement.
  1. Define - Define abnormal returns.
  2. Context - Use it in a sentence.
  3. Quiz - Test your knowledge.
Paul Alan Davis, CFA, October 17, 2016
Updated: December 16, 2018
The term abnormal return has a different meaning to scholars and to those who create online finance dictionaries. Here we prefer the more nuanced and accurate academic definition.

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Abnormal returns

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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 return, and scholars seek any statistically significant abnormal return.

Synonym: exceptional return

In a Sentence

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

Video

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Video Script

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Quiz

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

True

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