Positive Abnormal Returns: Growth You Can Trust

Have you ever initiated an investment that provided you with an abnormal return?  An abnormal return results when an asset price surpasses expectations of what the asset price should be. For example, let’s say that you wanted to purchase stock in Apple at $400 per share and that you expect the share to be worth $450 each in three months. If the share price rises to $475 per share, then you would have achieved an abnormal return of $25 per share. This was the return that you experienced that was above and beyond expectations.

It’s important to note that expectations for stock prices can refer to a variety of different asset pricing models. It’s not realistic to simply pull numbers out of the air and say that “I expected the price to go to (x) therefore my abnormal return is (y)”. There must be some sort of analytical methodology behind your analysis.  You should ask yourself a few easy questions:

  1. What do you expect the stock price to be?
  2. When do you expect the stock price to reach that point?
  3. Why do you expect the stock price to be at what you claim?

Positive abnormal returns are usually found with high growth companies that have a lot of buzz surrounding their business. However, if you’re not careful and you choose the wrong stock it is possible to have a negative abnormal return. Pay close attention to your investment techniques to ensure that you are setting yourself up for growth you can trust.