The excess return is computed by ______ the average return for the investment.

• A. adding the risk-free rate to
• B. multiplying the risk-free rate by
• C. subtracting the risk-free rate from
• D. dividing the risk-free rate by

Answer: (C)

Verified step by step guidance

1. Understand the concept of excess return: Excess return is the return on an investment above the risk-free rate. It measures the additional return earned by taking on risk.
2. Identify the components involved: The average return for the investment and the risk-free rate are the two key elements in this calculation.
3. Determine the relationship between the two components: To calculate excess return, you subtract the risk-free rate from the average return of the investment. This is because the risk-free rate represents the baseline return that could be earned without taking on risk.
4. Express the formula mathematically: Excess Return = Average Return - Risk-Free Rate. This formula highlights the subtraction operation required to compute the excess return.
5. Apply the formula to any given data: Plug in the values for the average return and the risk-free rate into the formula to compute the excess return. Ensure proper subtraction is performed.