It turns out that not all benefits can be considered good. Abnormal Returns in Crypto are one of the important things to be aware of. Check out the explanation here!
What is Abnormal Return?
Abnormal returns are investment results that significantly deviate from expected levels, whether very high or low. In such situations, the performance of an investment or fund exhibits performance that differs from the norm.
The impact of abnormal returns is temporary and may be caused by unusual fundamentals or fraudulent activity by the entity managing the fund.
For example, you invest in stock ABC with the hope of earning a profit of 10% per year. However, ABC shares actually provide a profit of 20% per year. In this case, you earn an abnormal profit of 10%.
Abnormal profits can be an opportunity to gain greater profits. However, the risks are also higher because these profits are unpredictable. Therefore, investors must be careful in making investment decisions.
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The Importance of Abnormal Returns
When evaluating the performance of a portfolio compared to the general market or benchmark index, abnormal returns become very important. It helps in assessing and identifying the risk adjustment skills of a portfolio manager, and indicates whether investors are adequately compensated for the perceived level of investment risk.
More importantly, abnormal returns are different from negative returns, because they can be positive or negative. It is a concise measure of the difference between actual and expected results, making it a valuable metric for comparing results with market performance.
Abnormal Return as a Valuation Metric
Through Abnormal Return we can assess the risk performance of a portfolio relative to market norms and benchmark indices. This helps determine whether the investment provides adequate compensation for the risk taken. Calculating positive or negative abnormal returns involves subtracting actual returns from anticipated returns.
For example, if a mutual fund with an anticipated annual return of 12% achieves a return of 26%, this represents a positive abnormal return of 14%. On the other hand, if the mutual fund actually provides a return of 3%, you will experience a negative abnormal return of 9%.
Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM) is a tool used to calculate the expected level of return for a particular investment or portfolio. It describes the relationship between risk and expected return.
After determining the expected income, the abnormal return can be determined by subtracting the expected return from the achieved rate of return. Abnormal returns are based on the performance of a security or portfolio.
Cumulative Abnormal Return (CAR)
Cumulative Abnormal Return (CAR) is the amount of abnormal returns over a certain time period. This allows investors to assess the performance of an asset or security over a certain period of time, especially since abnormal returns over short periods tend to be skewed.
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DISCLAIMER: This article is informational in nature and does not constitute an offer or solicitation to
sell and buy any crypto asset. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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