In the book, The Basics of Finance, it is mentioned a few times about the term "abnormal returns" from beating the market.

May I know what then does a "normal return" refer to?

If a company is trading today at $X, what is the normal return?


Return refers to (New Price - Old Price) ÷ Old Price and is expressed in %.

Once you have gathered the daily returns of a stock (e.g. 250 days) and the daily returns of the broad market index of the appropriate industry or country, you will notice that when market goes up, the stock also goes up by a certain ratio (also known as Beta).

Suppose on average when market goes up by 1%, the stock goes up by 0.7%. When the market goes down by 1%, the stock also goes down by 0.7%. This is roughly 0.7 Beta.

The Normal Return (Daily) of the stock is roughly = Risk Free Rate + (Beta x Market Return).

If the Actual Return on average is higher than the Normal Return, the difference is called Alpha.

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