I'm confused on what we mean to measure with the Required Return. In the paper Roth says that the increase in surplus needs to enough to cover increases in reserves, the demand for insurance, inflation, and any dividends paid to stockholders.
I took what is the required rate of return to mean what % change is necessary to accomplish the objective. So I just added the componenets (adjusting reserves for demand) making sure to add dividends as a percent of beginning surplus.
The solution subtracted from the dividends we pay out, the capital paid in? This doesn't make sense to me. If we subtract it out, our required return is a target that assumes we need capital added in through the year. Wouldn't we want a required return to not need capital paid in and then use capital paid in to get to an ACTUAL return that we can compare to the required return?
Admittedly material on this exam is my weakest area of knowedge.
I took what is the required rate of return to mean what % change is necessary to accomplish the objective. So I just added the componenets (adjusting reserves for demand) making sure to add dividends as a percent of beginning surplus.
The solution subtracted from the dividends we pay out, the capital paid in? This doesn't make sense to me. If we subtract it out, our required return is a target that assumes we need capital added in through the year. Wouldn't we want a required return to not need capital paid in and then use capital paid in to get to an ACTUAL return that we can compare to the required return?
Admittedly material on this exam is my weakest area of knowedge.
Roth Required Return - 2008 Q13
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