Risk-Adjusted Return On Capital (RAROC)
Candlefocus EditorRAROC looks at how much capital is actually available to a company, project, or asset, and then calculates the expected return from that capital taking into account any expected losses. Riskier investments and projects should be accompanied by higher expected returns, which are taken into account when using RAROC. RAROC allows investors and financial organizations to better assess the true potential returns of their investments by taking into account the potential risks as well.
RAROC is especially relevant and useful for the banking sector. Banks are exposed to certain risks such as credit risk, interest rate risk, and liquidity risk. RAROC is used to evaluate financial performance while considering those risks. This allows banks to make better informed decisions on which investments and projects will be most lucrative taking into account the level of associated risk.
RAROC is also seen as a way of making traditional return on capital a more transparent and fair measure of performance. By taking into account the associated risks, RAROC provides a more complete picture of the financial performance of each investment or project. RAROC also allows for better comparison between different investment opportunities and possibilities, as the associated risks are taken into account when calculating the expected returns.
Overall, RAROC is an effective and useful way of measuring the financial performance of investments and projects. By taking into account the level of risk associated with the project, investors, banks and other financial organizations can make more informed decisions and have a better understanding of the true potential profitability and return on investment of their investments.