# Abnormal Return

## How to Calculate Abnormal Return

Abnormal Return is calculated by taking the difference between the actual Return of the security or portfolio and the expected return, as determined by a market index or benchmark. To calculate Abnormal Return:

1. Determine the expected Return of the security or portfolio using a market index or benchmark.
2. Calculate the actual Return of the security or portfolio over the same period.
3. Subtract the expected Return from the actual Return to find the Abnormal Return.

The formula for calculating Abnormal Return is:

Abnormal Return = Actual Return - Expected Return

Where Actual Return is the actual Return of the stock or portfolio and Expected Return is the expected Return of the stock or portfolio based on a market index or a specific benchmark.

The advantages of using Abnormal Return as a measure of performance include its ability to control market factors and its comparability across different securities and portfolios. Additionally, Abnormal Returns can identify underperforming or out-performing securities within a portfolio, allowing for more informed investment decisions.

## Types of Abnormal Return

There are several types of Abnormal returns, including:

• Positive Abnormal Return (PAR): This occurs when the actual Return of a security or portfolio is greater than the expected Return given the market's overall movement. PAR is often considered a measure of outperformance.
• Negative Abnormal Return (NAR): This occurs when the actual Return of a security or portfolio is less than the expected Return given the market's overall movement. NAR is often considered a measure of underperformance.
• Cumulative Abnormal Return (CAR): This is the sum of the Abnormal returns over some time. It measures the overall performance of a security or portfolio relative to the market.
• Abnormal Volatility: Abnormal volatility is the difference between the actual volatility of a security or portfolio and the expected volatility, given the overall market movement.
• Market Adjusted Return: This is the Return adjusted for market risk by subtracting the risk-free rate from the returns.

Abnormal returns are widely used in finance to measure the performance of a security or portfolio relative to the market and identify underperforming or out-performing securities within a portfolio. Investors, portfolio managers, and financial analysts can use these Abnormal returns to make more informed investment decisions.

## Example of Abnormal Return

An example of an Abnormal Return is the stock price increase of GameStop Corp (GME) in January 2021. The stock, trading at around \$20 per share in late December 2020, rose to a high of \$347 per share in late January, an increase of over 1,600%. This sudden and unprecedented increase in the stock price was driven by a group of amateur investors who organized on social media platforms, such as Reddit, to buy shares of the company and drive up the price to force a short squeeze on hedge funds that had bet against the company. This event was widely reported in the media as an example of an Abnormal Return in the stock market.