What is “Abnormal Rate of Return” in stocks?
Abnormal Rate of Return is the return on a given stock or portfolio over a specified period of time. This is usually higher than the expected rate of return or the benchmark.
- It is also known as ‘alpha’ and is a risk-adjusted performance measure of the stock. The expected rate of return is usually predicted by capital asset pricing model (CAPM).
- This rate can be either positive or negative as compared to its performance against the benchmark. It is also useful tool of valuation for investors for comparison of returns to market performance.
It is calculated as follows: