Abnormal Return
Abnormal Return — Return versus expected/factor model return.
Definition
Abnormal return is realized return minus the return expected from a chosen benchmark or factor model (CAPM, FF, custom risk model). It is the residual after systematic exposures are stripped — the object people loosely call “alpha” in an event or attribution window.
Why it matters
Without a model, raw returns mix beta, style, and luck. Abnormal return forces an explicit null: what should this name or book have earned given its risks? Desk P&L reviews, event studies, and manager scorecards all rest on that null.
Case
A stock up 8% on earnings is not automatically a win. If the sector and momentum cohort also ripped 7%, abnormal return may be near zero — the tape moved, the residual did not. Conversely a flat print with a collapsing peer set can still show positive abnormal return.
How to read it
Always name the model and window. Change the factor set or estimation window and the residual moves. Treat single-name abnormal returns as noisy; stack them across events or books before updating conviction.