A single stock or portfolio of stocks which varies in the market average is defined as abnormal return in the stock market trades. If the stock outperformed the market average then the abnormal return will be positive, and if it underperformed then it will be negative. This abnormal return definition is relevant with financial gains and losses which are measured against the actual index instead of artificial or hypothetical measure. Broad based performance of an index is usually called the market average such as the Standard & Poor’s 500 is widely followed index in United States. Other countries are having their own market index according to their national markets for purposes of determining abnormal returns.
Calculation of Abnormal Return:
Initial abnormal return calculations are little simple which are done by subtracting the index performance from the individual stock or portfolio’s performance. That’s the raw measuring of stock’s performance in a certain time period, this measuring wont calculate the fluctuations which are naturally over a given period. The percentage sum of all abnormal returns over a defined period of time is called cumulative abnormal calculation that account for these normal variations. [click to continue…]
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