Welcome to the hotseat. We've prepared a guide if you'd like to read more about how it works.
0 votes
44 views
in BUS 4027W - Actuarial Risk Management by

How does one find the Return on Equity in a situation like Question 2,Test 2, 2015?

I tried ROE= Total Proft/Shareholder Equity to no avail. Which elements of the accounts presented does one use?

2015 BUS4027W Test 2.pdf (0,8 MB)


Your help will be appreciated!


1 Answer

0 votes
by (860 points)
 
Best answer
Hi there

This is Rohin speaking through Vegan. I lost my login details. 

You should use average equity rather than equity at the beginning of the year. 

We might be increasing our equity during the year and hence in order to calculate the true value of the return generated from the equity available, it would make sense to calculate the return based on the average equity available. More complicated methods would be to use Simpsons rule to approximate the average equity. Jokes... just take the simple arithmetic average. 

Example:

Year 2 ROE = 134/(0.5*(273+318)) = 0.45
...