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).
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Risk adjusted return on capital (RAROC) thus became a vital management metric, with economic capital as its key risk-sensitive input.
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Risk adjusted return on capital (RAROC)--a measure of profitability of a business activity based on whether its return on capital is above or below its equity hurdle rate--is 20 percent.
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