Risk-Adjusted Return on Capital (RAROC)

Risk-Adjusted Return on Capital (RAROC) is a financial metric used to evaluate the profitability of an investment while considering its risk. It helps investors and businesses determine whether the returns from an investment justify the risks taken. RAROC is calculated by dividing the net income from an investment by the economic capital required to support it, adjusting for the risk involved. A higher RAROC indicates that an investment is generating better returns relative to the risks, making it a valuable tool for decision-making in finance and investment management.