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Abnormal Return Meaning

Abnormal return describes the portion of an investment’s performance that deviates from what would be expected given its risk profile and market conditions. It can be positive or negative and is calculated as the difference between the actual realized return and an expected return derived from a model or benchmark, such as the Capital Asset Pricing Model (CAPM) or a relevant index. For example, if a mutual fund is expected to generate a 12% return based on its market exposure and instead delivers 26%, the abnormal return is +14%.

If it returns only 3%, the abnormal return is −9%. In both cases, the metric isolates how much of the outcome cannot be explained by standard risk factors alone.

Abnormal return is related to, but distinct from, the concept of alpha. Alpha generally refers to persistent, risk-adjusted outperformance attributable to a manager’s skill or a repeatable process.

Abnormal return, by contrast, may reflect one-off events, news shocks, earnings surprises, regulatory changes, or even temporary mispricings. When aggregated over a window around an event, Cumulative Abnormal Return (CAR) is often used to analyze how markets respond to corporate announcements or macro developments.

For investors, studying abnormal returns helps assess whether a strategy is adequately compensating for risk and whether performance is driven by systematic exposures or idiosyncratic factors. It also highlights episodes where prices move in ways that traditional models fail to explain, which can be relevant for risk management, event studies, and strategy evaluation.

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Finery Markets BVI Limited (“Finery Markets”) provides software, technology infrastructure, and related Information and Communication Technology (ICT) services on a Software-as-a-Service (“SaaS”) basis. Finery Markets acts solely as a software vendor and does not operate a trading platform, does not intermediate, match, execute, clear, or settle transactions, and does not engage in any activities that would require regulatory authorisation under applicable laws.

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