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In finance, an abnormal return is the difference between the actual return of a security and the expected return.Abnormal returns are sometimes triggered by "events." Events can include mergers, dividend announcements, company earning announcements, interest rate increases, lawsuits, etc. all of which can contribute to an abnormal return.
For firms that report good news in quarterly earnings, their abnormal security returns tend to drift upwards for at least 60 days following their earnings announcement. Similarly, firms that report bad news in earnings tend to have their abnormal security returns drift downwards for a similar period. This phenomenon is called post-announcement ...
Methodologically, event studies imply the following: Based on an estimation window prior to the analyzed event, the method estimates what the normal stock returns of the affected firm(s) should be at the day of the event and several days prior and after the event (i.e., during the event window).
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In finance, Jensen's alpha [1] (or Jensen's Performance Index, ex-post alpha) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. It is a version of the standard alpha based on a theoretical performance instead of a market index .
The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). It is a measure of the center of the distribution of the random variable that is the return. [1] It is calculated by using the following formula: [] = = where