In this article I will explain you abnormal return definition and calculation of simple and cumulative abnormal return.
Abnormal return definition
In the world of stock market trades, the financial performance by a single stock or portfolio of stocks that varies from the market average is referred to as the accepted abnormal return. An abnormal return can be positive or negative. Whether it is positive or negative it all depends on whether the stock outperformed or underperformed the average market performance.
This abnormal return definition does not refers to an artificial or hypothetical measure, rather than that it refers to financial gains and losses measured against an actual index.
Market average
The performance of a broad-based index is defined as the market average. In the United States, the Standard & Poor’s 500 is an example of a widely-followed index, while for purposes of determining abnormal returns other areas may index their market average to their own national markets.
Abnormal Return Calculation
It is simple to calculate the initial abnormal return.
