Which of the following is difference between the expected return and actual return on an investment?
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A. B. C. D.B
The correct answer to the question is C. Normal return.
Let's break down the difference between expected return and actual return on an investment:
Expected Return: The expected return is an estimate or prediction of the average return that an investment is anticipated to generate over a given period of time. It is based on various factors such as historical performance, market trends, economic conditions, and the specific characteristics of the investment itself. Expected return is typically calculated using statistical models and analysis. It serves as a benchmark or a target for investors to assess the potential profitability of an investment.
Actual Return: The actual return, on the other hand, is the real, realized return that an investment generates over a specific period of time. It represents the actual gain or loss experienced by an investor. The actual return is determined by the performance of the investment in the market and is influenced by various factors such as market conditions, company performance, interest rates, geopolitical events, and other unforeseen circumstances. It is calculated by taking into account the change in value of the investment (including any income generated) and comparing it to the initial investment or the investment's cost basis.
So, the difference between the expected return and actual return is referred to as the normal return (Option C). Normal return represents the variation or deviation between the anticipated return (expected return) and the realized return (actual return). It captures the fluctuations or variances in the performance of an investment relative to its expected performance. This difference can be positive or negative, indicating whether the actual return exceeded or fell short of the expected return.
It's important to note that abnormal return (Option B) refers to the return on an investment that is unexpected or inconsistent with the overall market or industry performance. It is often associated with events such as company-specific news, earnings surprises, mergers and acquisitions, or other significant developments that cause a temporary deviation from the normal return. Abnormal returns are typically seen as opportunities for investors to exploit market inefficiencies or make short-term gains.
Lastly, tax return (Option D) is unrelated to the concept of expected return and actual return in the context of investments. Tax return refers to the annual report of an individual's or entity's income, deductions, and tax liability submitted to the tax authorities for the purpose of determining the tax payable or the refund owed.
To summarize, the correct answer is C. Normal return, as it represents the difference between the expected return and the actual return on an investment, capturing the variations or deviations from the anticipated performance.