Which statement describes above-average returns?

• A. Returns equal to the market average
• B. Returns below what investors expect
• C. Returns generated only from intangible assets
• D. Returns in excess of what an investor expects to earn from other investments with a similar risk

Answer: (D)

Above-average returns are those that exceed what you would expect to earn given the level of risk you’re taking. In practice, investors compare performance to returns offered by investments with similar risk, and if you earn more than that expectation, you have a positive alpha—an above-average result for that risk level. The statement that describes this best is returns that come in higher than what an investor expects to earn from other investments with similar risk, because it directly captures earning more than the required compensation for risk.

The other options don’t fit because: earning exactly the market average is not above average; earning less than expected is underperformance; and returns coming solely from intangible assets say nothing about how they compare to the risk-adjusted expectations of similar investments.