Abnormal return, in the context of financial markets, refers to the difference between the actual return on an investment and the expected or “normal” return. It is a measure used in financial analysis to assess the performance of an investment relative to a benchmark or the broader market.

Key points about abnormal return include:

1. **Expected Return:** The expected return is the anticipated or “normal” return that investors would typically expect based on the risk and market conditions. It is often estimated using financial models, historical performance, or benchmark indices.

2. **Actual Return:** The actual return is the realized return on an investment over a specific period. It is the percentage change in the investment’s value, including both price appreciation and any income generated, such as dividends or interest.

3. **Abnormal Return Calculation:** The abnormal return is calculated by subtracting the expected return from the actual return. Mathematically, it is expressed as:

\[ \text{Abnormal Return} = \text{Actual Return} – \text{Expected Return} \]

4. **Market Model:** The Capital Asset Pricing Model (CAPM) is one commonly used framework for estimating expected returns. It considers factors such as the risk-free rate, market risk premium, and the asset’s beta (a measure of its sensitivity to market movements).

5. **Event Studies:** Abnormal returns are often used in event studies to analyze the impact of specific events, such as earnings announcements, mergers and acquisitions, or changes in economic conditions, on the stock prices of companies.

6. **Interpretation:** A positive abnormal return indicates that the investment outperformed expectations, while a negative abnormal return suggests underperformance. Investors and analysts use abnormal returns to evaluate the effectiveness of investment strategies or the impact of specific events on stock prices.

7. **Benchmark Comparison:** Abnormal returns are often compared to a benchmark index or a relevant market index to assess how an investment performed relative to the broader market.

8. **Efficient Market Hypothesis (EMH):** The concept of abnormal return is related to the Efficient Market Hypothesis, which posits that in an efficient market, it should be challenging to consistently achieve abnormal returns because prices quickly adjust to new information.

It’s important to note that abnormal returns can be influenced by various factors, including market conditions, investor sentiment, and unexpected events. Investors and analysts should carefully consider the context and potential sources of abnormal returns when interpreting the performance of an investment.