An Abnormal Return is an unusually large profit or loss generated by a given investment or portfolio over a specified period. The performance diverges from the investments' expected, or anticipated, rate of return (RoR)—the estimated risk-adjusted return based on an asset pricing model, or using a long-run historical average or multiple valuation techniques.There are various reasons why an investment may generate abnormal returns. One could be due to market inefficiencies: for example, when investors overreact to new information and prices move away from their fundamental values. Or it could be that the investor has specific information that other market participants don't have—for instance, about upcoming company news or regulatory changes. Finally, it's also possible that luck is simply on the investor's side during some periods and not others!No matter what the reason behind them, abnormal returns can provide valuable insights for investors looking to maximize their profits—or minimize their losses! By identifying investments with abnormally high (or low) returns relative to their peers, one can get a better sense of where potential opportunities and risks may lie. And while there's no guarantee that future performance will mirror past results, this analysis can still be helpful in framing expectations and making informed decisions about where to allocate one's capital.
