Abnormal return

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In finance, an abnormal return is the difference between the expected return of a security and the actual return. Abnormal returns are sometimes triggered by "events." Events can include mergers, dividend announcements, company earning announcements, interest rate increases, lawsuits, etc. all which can contribute to an abnormal return. Events in finance can typically be classified as occurrences or information that has not already been priced into the market.

[edit] Stock market

In stock market trading, abnormal returns are the differences between a single stock or portfolio's performance in regard to the average market performance over a set period of time.^[1] Usually a broad index, such as the S&P 500 or a national index like the Nikkei 225, is used as a reference for the average market performance. For example if a stock increased by 5% because of some news which affected the stock price, but the average market only increased by 3%, then the abnormal return was 2% (5% - 3% = 2%). If the market average performs better than the individual stock then the abnormal return will be negative.

$A b n o r m a l R e t u r n = A c t u a l R e t u r n - N o r m a l R e t u r n$

In contrast, excess returns are returns above the risk-free rate, what as used in the CAPM is the expected excess return instead of excess return itself. Expected excess return is so called risk premium by definition.