An abnormal stock return can either help or hurt your portfolio. This return measures the difference between the actual return a stock earns over a certain period and the return you normally expect it to earn. The normal expected return is typically based on the S&P 500 index’s return, adjusted for the particular stock. The S&P 500 tracks 500 large, well-known companies and represents the performance of the overall U.S. stock market. A positive abnormal return means a stock performed better than the market, while a negative one indicates that the stock underperformed the market. Identifying and calculating both expected and abnormal returns involves determining the Beta value of a stock and assessing its performance relative to the market as a whole.
Abnormal returns are calculated no differently than normal returns. In order to determine a stocks return, you will need two prices reflecting the value of the stock at the beginning of the period of evaluation and at the close.
Identify the Stock's Beta
Visit any financial website that provides stock quotes. Type a company’s name or its stock’s ticker symbol of capital letters into the stock quote text box and click “Get Quote.” Click “Key Statistics” or a similar link. Identify the stock’s beta, a statistic that measures a stock’s typical price movements relative to the S&P 500. For example, assume a stock’s beta is 1.3. This means that the stock is slightly more volatile than the market as a whole
Look Up the Stock's History
Click “Historical Prices” to view a list of the stock’s past prices. Identify the adjusted closing price on the first and last day of the period for which you want to calculate the abnormal return. An adjusted closing price is a stock’s actual closing price adjusted for dividends and stock splits. In this example, assume you want to calculate the abnormal return between last Monday and Friday. Assume the adjusted closing price was $10 on Monday and $10.50 on Friday.
Calculate Stock's Actual Return
Divide the adjusted closing price at the end of the period by the one at the beginning of the period. Subtract 1 from your result to calculate the stock’s actual return. In this example, divide $10.50 by $10 to get 1.05. Subtract 1 from 1.05 to get 0.05, or 5 percent.
Find Index's Adjusted Closing Price
Visit the financial website’s home page, and click the S&P 500 quote near the top of the page. Click “Historical Prices.” Find the index’s adjusted closing price on the same days as you did for the stock. In this example, assume the S&P 500 closed at 1,750 last Monday and 1,785 on Friday. Divide the ending adjusted closing price by the beginning adjusted closing price. Subtract 1 from your result to calculate the index’s return. In this example, divide 1,785 by 1,750 to get 1.02. Subtract 1 from 1.02 to get 0.02, or 2 percent.
Determine the Stock's Performance
Multiply the stock’s beta by the S&P 500’s return to estimate the return you’d normally expect the stock to earn over the same period. In this example, multiply 1.3 by 0.02 to get 0.026. Subtract your Step 9 result from your Step 5 result. Multiply this result by 100 to calculate the stock’s abnormal return as a percentage. Concluding the example, subtract 0.026 from 0.5 to get 0.024. Multiply 0.024 by 100 to get an abnormal return of 2.4 percent. This means your stock generated a return that’s 2.4 percent better than expected.