RAROC

RAROC (Risk-Adjusted Return on Capital) is a financial metric used to measure the profitability of an investment or business activity after accounting for the risk involved. It helps organizations assess whether the returns generated justify the potential risks taken. Essentially, RAROC compares the net profit earned from an activity to the amount of capital allocated to it, adjusting for risk exposure. A higher RAROC indicates better risk-adjusted performance, guiding better decision-making to ensure that resources are used where they generate sufficient risk-adjusted returns.