An abnormal return is the difference between an investment's actual return over a specified period and the return that was expected based on a theoretical model — such as the Capital Asset Pricing Model (CAPM) — given the asset's risk profile and prevailing market conditions. Positive abnormal returns indicate that the investment outperformed what was theoretically predicted by its risk exposure, while negative abnormal returns signal underperformance relative to risk-adjusted expectations. Abnormal returns are the foundation of event study methodology in academic finance — researchers calculate cumulative abnormal returns (CAR) around specific corporate events such as earnings announcements, merger disclosures, dividend declarations, and regulatory decisions to measure the market's reaction to new information. In Indian equity research, abnormal returns are used to assess whether events like SEBI enforcement actions, RBI rate decisions, or index reconstitution announcements generate significant price responses beyond what normal market movement would predict. Alpha — the holy grail of active fund management — is conceptually equivalent to persistently generating positive abnormal returns above the risk-free rate after adjusting for systematic market risk through the fund's beta.
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