Return on Risk Adjusted Capital (RORAC) is a method of financial analysis used to compare the relative value of capital projects and investments by adjusting returns for the amount of risk associated with each project. The idea behind RORAC is that in a perfect market with no external factors influencing risk, an investor should earn a return which is proportional to the amount of risk they are taking. All else being equal, a greater amount of risk should yield a higher return on investment (ROI).

RORAC is calculated by taking the expected rate of return from an investment, and adjusting it to reflect the amount of risk associated with the project. The adjusted return is calculated using an equation which takes into account the standard deviation of returns, as well as the expected rate of return. This adjusted return is used as a benchmark for analysing prospective investments.

The risks taken into account may include market risk, liquidity risk, credit risk, default risk and country risk. Depending on the industry or sector, some types of risk may be more relevant than others.

RORAC is particularly useful when comparing investments with different risk profiles. For example, an investor looking to compare a bond portfolio to and a stock portfolio may use RORAC to determine the expected returns of each compared to the risks they take. This allows the investor to determine which portfolio will yield the highest return adjusted for the risk they are taking.

RORAC is a valuable tool for investors, financial institutions and companies looking to compare the relative value of different investments. By adjusting returns for the amount of risk associated with each project, RORAC allows for a more accurate and informed assessment of different projects. Through the use of RORAC, investors are able to make more informed decisions about their investments and maximize their returns.