Exam 9 Practice Question 6
Study guide: Exam 9
A book of business has premium of 100, expected loss of 94 and allocated capital of 50, in a one-period model with no expenses, taxes or investment income. Management's target return on capital is 15%. Premium and expected loss cannot change.
Using the decomposition of return into margin ratio and leverage, calculate the premium-to-capital leverage the book would need to earn the target return.
- A) 0.40
- B) 0.71
- C) 2.00
- D) 2.35
- E) 2.50
Answer this question and see the worked solution