A non-bank with a leverage multiple of 10 is seeking high returns on its investment (total) assets, currently valued at $10bn. Say the probability of a 5% investment return is thought to be 80% and that the alternative scenario, with a probability of 20%, is a loss of 5%.

 

2a) What is the expected rate of return on assets (RoA)?

2b) What is the expected rate of return on equity (RoE)?

2c) What links the RoE to the RoA?

2d) What is the risk for shareholders (the standard deviation of % returns on equity)?

2e) What is the VaR? (the principal downside scenario for equity citing both the $bn amount and its probability)