Abnormal Return
Abnormal or excess return as part of total portfolio return
Abnormal return is the component of the total return on an investment or portfolio of investments, which can’t be explained by systematic factors. Systematic factors are those which can’t be influenced by that one particular investor, usually the term represents the general movement of the whole market.
Abnormal return is often also called excess return.
Positive and negative abnormal return
Abnormal return can be positive or negative. For example, if you hold a portfolio of stocks and in the last year your portfolio grew by 12%, while the stock market as a whole (represented by a stock index, for example S&P500) increased only by 8%, the abnormal or excess return of your portfolio was 4%, as “normally” you would expect it to rise 8% like the whole market. On the other hand, another portfolio which would have grown only 2% would have the abnormal return of negative 6%, as it would lag by 6 percentage points behind the whole market.
