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.
For credit extension performance measurement, RAROC methodology adoption is justified, which relates return on capital offered by a transaction, or a deal, at the investment risk rate, in other words, risk-adjusted return on capital (CROUHY, GALAI and MARK, 2004).
In addition to promoting increased awareness of bank RAROC requirements, companies consider several factors, such as bankers' history of commitments when managing relationships.
In fact, much of the debate about RAROC or earnings-at-risk or value-at-risk methodologies has been centered on the measurement of the amount of shareholders' capital-at-risk.
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.
By having portfolio-driven price recommendations and other analytics embedded within the origination process, your organisation has a system in place for measuring and analysing RAROC - and will have a process in place to allocate capital more effectively.
Zechner, 2007, Optimal Capital Allocation Using RAROC and EVA, Journal of Financial Intermediation, 16: 312-342.
Someone in Timbuktu who wants to know the company's RAROC can access our application quickly and easily.
This pricing adjustment can be calculated via a risk/return framework such as risk-adjusted return on capital, which is known by the acronym RAROC.
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.