Monday, September 3, 2012

Abnormal Returns and Facebook Investors

Just one quick google of Facebook will provide an abundance of news articles like the one above. Facebook is definitely slipping, and investors are not happy.

Reading these headers reminded me of the term abnormal return- the difference between the actual return of an investment and the expected return of an investment. Consider an investment that was expected to rise 8% but actually rose 10%. This investment would have a +2% abnormal return. Similarly, if that same stock that was expected to rise 8% actually only 6%, that stock would have a -2% abnormal return.

As you can see, an investment can have a negative abnormal return even though an investment has a positive worth.

Abnormal returns are clearly linked to the present Facebook stock situation... Many people who invested in Facebook with the expectation of a positive return but are instead disappointed with a negative abnormal return.

I intend on writing another blog post soon related to the relative value of Facebook. Until then, keep your eye out for other abnormal returns and let me know if you find any interesting ones.