Does investment income include capital gains/loss?
In formula for ROR, realized capital gains/losses are substracted from investment income, it seems the investment income includes capital gains/losses; But in formula for adjusted investment yield, realized capital gains/losses are added to investment income when calculate net investment income. it seems investment income doesn't includes capital gains/losses. Are they both correct?
Comments
In ARinst, investment income=investment revenue-investment expense. should I assume this investment revenue includes capital gains?
The correct answer is that investment income does include realized capital gains. Unfortunately, the people who create the exam questions are are not consistent. In exam questions from prior years, sometimes realized gains are included with investment income and sometimes they are not. There is a forum thread from a previous sitting that discusses this:
The best advice here is to state your assumptions. If this comes up on your exam, you could submit an appeal for a defective question immediately after the exam.
The challenge relates to the wording of the MSA ratios vs. P&C-1. MSA refers to "Investment Income less Gains" and P&C refers to "Net Investment Income". So depending on the section the wording might be different. (For a technical paper, the MSA paper is pretty lax on proper financial references).
I think when you look at it from that perspective it might be more clear.
http://www.osfi-bsif.gc.ca/eng/fi-if/rtn-rlv/fr-rf/ic-sa/pc-sam/Pages/pc1.aspx
P&C-1 Investment Operations Income is Gross (subsequently refers to Net Investment Income)
MSA: Investment Income is really "Net Investment Income"
If you're clear on your assumptions and write out the RoR equation correctly, you should get full marks regardless.
This most important thing for CAS is writing out the correct equation for MSA ratios (so do that as step 1). A P&C-1 question will focus on the components that go into Net Investment Income.