An abnormal return refers to the abnormal profits generated by invested securities or portfolios over a particular period. The operation is usually different from the expected, or expected, return (RoR). The expected ROR is normally the expected return based on a multiple evaluation, using a suitable range of historical averages or future rates of returns.
Abnormal returns can be calculated using the Monte Carlo Simulation (MCS) method. This method involves a number of assumptions such as: future economic conditions, future market price changes, future risk factors, and a number of different time periods. The analysis is done with several distinct scenarios, where each situation is analyzed with the different assumptions.
In most cases, the abnormal returns are related to one or more underlying assets, either the individual investor’s portfolio or the economy as a whole. However, there may be some cases where the abnormal return could be directly associated with one or more specific investments. A good example would be when the returns are due to increased stock prices or bond rates.
An abnormal return may also happen as the result of the typical asset portfolio, the market, or even in the portfolio of a single investor. By way of instance, the ROA can be raised by raising the return on equity or bond investments. The yields on equities, in general, usually increase as the costs rise and as the market increases in size and value. Bonds, on the other hand, usually boost the yields over the long term.
For example, if the return on the bond portfolio was 5 percent per annum and the average rate of interest was two percent, a five percent increase in the return would result in an increase of 25 percent. If the portfolio comprised all bonds, there are a corresponding growth of five percent in the ROA. If the portfolio held just 1 type of bond, the ROA could be diminished by the sale of the bond into a lower bond issuer in the present rate, thus causing the balance in the portfolio to increase.
Some individual portfolios are actually more risky than others. An example of this are the portfolios that have a high rate of growth and are expected to be increasing. Over the long term. However, a portfolio which has a high rate of gain is typically less risky, since the expected rate of profit is relatively constant.
The risks involved with individual portfolios or securities can be calculated based on a statistical model called the RICO, which stands for”risk factors indicator”. This model includes the features of the portfolio, the risk-factor, and historical and current market information. If the model involves a high risk factor, the results demonstrate that the portfolio is considered more risky and should therefore be purchased in smaller portions. This is the case once the value of the portfolio will change more than the rate of growth over time.
Other common financial terms used to describe an abnormal return are: over or under admiration, underperformance, drawdown, leverage, etc.. Under or over Achievers and Under Performers are some examples of this. Achievers are a fantastic illustration of those terms; underachievers are an example of underachievers.
risk of depreciation?
Another typical example is a portfolio manager who purchases a portfolio of assets that have a high risk of depreciation. If the portfolio manager holds these assets in a fixed rate of return, he can use the value of these assets to find out his own valuation and calculate the normal Return on Equity. By comparison, an under performer is someone who performs below the expected level and the portfolio manager doesn’t have any way of determining his valuation.
Returns on Equity (ROE)
Abnormal Returns on Equity (ROE) are also called the risk-factor of a portfolio. If the average rate of return is low, it can cause the asset’s yield to be high in comparison to other similar assets of the same class.
The ROI calculation is based on an assumption that the value of the portfolio will remain the same over the period and the portfolio manager’s discount rate will remain the same for the duration of the contract. A high rate of return can cause a portfolio to have a very low ROI. However, since the portfolio is assumed to be steady over the duration, the rate of return will continue to be the same.