RAROC (Risk-Adjusted Return on Capital)

RAROC (Risk-Adjusted Return on Capital) is a financial metric that measures how much profit a bank or investment generates, considering the risks involved. It helps assess whether the returns earned justify the risks taken. Essentially, it compares the profit made from a specific activity or investment to the amount of capital at risk, adjusting for potential losses. A higher RAROC indicates better efficiency and risk management, guiding institutions to allocate resources wisely and ensure that the value gained outweighs the risks taken.