Risk Adjusted Return on Capital

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Risk Adjusted Return on Capital

A measure of the profitability of an investment or business after accounting for its risk. This can help inform one's investment decisions. It is calculated as follows:

RAROC = ( revenue - expenses - expected loss + income from capital invested ) / capital

It should be noted that an investment's RAROC has become a less common measure than the risk adjusted return on risk adjusted capital (RARORAC).
References in periodicals archive ?
Now some of them are beginning to move to using an actual RAROC model to say, 'What are the banks getting from us?
The RAROC value indicates the size of the rewards brought about by the loss of one unit of capital, and effectively measures the efficiency of the risk of earning revenue; therefore, the bigger the value the better.
The amount of CaR allocated to the subunits and its price (that is, the RAROC objective each unit assumes) is determined by matching aggregate CaR demand coming from risk-taking units and aggregate CaR supply provided by corporate headquarters.
In this study, 10 financial ratio indicators were selected from the factor analysis procedure with RAROC as the evaluation criteria to evaluate the financial performance of Taiwan's listed opto-electronic companies.
Return on capital (ROC) can be adjusted for risk to become RAROC in a number of ways.
Full-information betas can be used by insurers in a variety of contexts, including the estimation of RAROC, insurance pricing, and decision making about entering or exiting lines of business.
Bankers and other investors can use these ratings to determine the appropriate loss and recovery inputs into RAROC and Capital-Allocation models.
SAS helps Bank Leumi manage based on RAROC, which brings much greater discipline to lending decisions and ensuring that reward is consistently and accurately linked to risk, thereby maximizing real returns.
The authors focus their attention on the RAROC methodology and present it as "a critical component of the integrated risk management framework" (p.
By adjusting for the underlying risks, RAROC provides a profitability measure that is comparable across different businesses.
Moreover, the application of economic capital and RAROC should establish the economic framework to evaluate the cost-benefit of various risk transfer strategies.
It focuses on how banks can use the new risk measurement rules to inform their business decision-making, facilitate RAROC (Risk Adjusted Return On Capital) modeling and help form the single customer view.