What is risk adjusted return on capital?

What is risk-adjusted return on capital? Risk-adjusted return on capital (RAROC) is a metric that can be used to calculate return in relation to the level of risk taken on. It can be used to compare the performance of multiple investments with differing levels of risk exposure. It is calculated by dividing expected return by risk.

What is RAROC (risk-adjusted return)?

Evaluating financial performance under RAROC calls for comparison to a benchmark return; when the benchmark return is risk-adjusted, the result is similar to risk-adjusted return on risk-adjusted capital (RARORAC), though the term RAROC is still applied.

What is economic capital based on risk?

Economic capital is a function of market risk, credit risk, and operational risk, and is often calculated by VaR. This use of capital based on risk improves the capital allocation across different functional areas of banks, insurance companies, or any business in which capital is placed at risk for an expected return above the risk-free rate .

What are some common risk measures used in investing?

Some common risk measures used in investing include alpha, beta, R-squared, standard deviation, and the Sharpe ratio. When comparing two or more potential investments, an investor should apply the same risk measure to each investment under consideration in order to get a relative performance perspective.