Additional return is a type of abnormal return. When your real/final return is greater than your expected return, it is called ‘Additional Return’.
The first step to comprehend the meaning of Additional Return is to understand what Abnormal Return is. It is obtained with this simple equation:
Abnormal return = Real Return – Expected Return
There are 2 types of Abnormal Return: Negative and Positive.
On the one hand, it is Negative when the Real Return is lower than the Expected Return. Basically, this negative outcome means that your investment provides you with less results/less money than you originally expected.
On the other hand, it is Positive when the Real Return is greater than the Expected Return, which is also called Additional Return. This positive outcome means that your investment was more profitable than you had originally expected, in other words, you have obtained better results/more money than you originally calculated.
To sum up, here you have 2 examples illustrating both Negative and Positive Abnormal Return:
Case 1: Positive Abnormal Return
You have an agreement with the bank, whose interest rate is 5% (Expected Return). However, due to an unexpected clause of antiquity, you are going to receive an interest rate of 6% (Real Return).
In this case, you are obtaining an Additional Return of 1%.
Case 2: Negative Abnormal Return
Sara applied for a mortgage. In that agreement there is a floor clause (The minimum interest rate you can pay) of 1%.
Today, the interests are lower (0.5%).
0.5% (Real Return) – 1% (Abnormal Return) = – 0.5%
As a result, Sara is getting a Negative Abnormal Return of 0.5%