What is 'RiskAdjusted Return On Capital  RAROC'
Riskadjusted return on capital (RAROC) is an adjustment to the return on an investment that accounts for the element of risk. Riskadjusted return on capital (RAROC) gives decision makers the ability to compare the returns on several different projects with varying risk levels. RAROC was popularized by Bankers Trust in the 1980s as an adjustment to simple return on capital (ROC).
Income from capital = (capital charges)*(riskfree rate)
Expected loss = average anticipated loss over the measurement period
BREAKING DOWN 'RiskAdjusted Return On Capital  RAROC'
In financial analysis, riskier projects and investments must be evaluated differently from their riskless counterparts. By discounting risky cash flows against less risky cash flows, RAROC accounts for changes in the profile of the investment. In general, the higher the risk, the higher the return. Thus, when companies need to compare and contrast two different projects or investments, it is important to take into account these possibilities.

RiskAdjusted Return
A concept that refines an investment's return by measuring how ... 
Return Of Capital
A return from an investment that is not considered income. The ... 
Return
The gain or loss of a security in a particular period. The return ... 
Economic Spread
1. A performance metric that is equal to the difference between ... 
Capital Investment Factors
Factors affecting the decisions surrounding capital investment ... 
Sharpe Ratio
The Sharpe Ratio is a measure for calculating riskadjusted return, ...

Investing Basics
Explaining RiskAdjusted Return
Riskadjusted return is a measurement of risk for an investment or portfolio. 
Term
What's a Return of Capital?
A return of capital is an investment return that is not considered income. 
Fundamental Analysis
Understanding the Internal Rate of Return Rule
The internal rate of return rule is a popular method used to compare investments or projects. 
Professionals
How To Measure Returns On The Series 65 Exam
An investor who is evaluating the performance of a portfolio manager must take into consideration the impact that any contributions or withdrawals made by the investor will have on the overall ... 
Bonds & Fixed Income
Understanding The Sharpe Ratio
This simple ratio will tell you how much that extra return is really worth. 
Term
Understanding Total Returns
Total return measures the rate of return earned from an investment over a period of time. 
Fundamental Analysis
How To Calculate Your Investment Return
How much are your investments actually returning? Find out why the method of calculation matters. 
Economics
Explaining Cost Of Capital
Cost of capital is the cost of funds used to finance a business. 
Investing Basics
More Ways to Evaluate Portfolio Performance
The Jensen measure is another tool investors use to include risk when measuring portfolio performance. 
Investing Basics
How to Use a Benchmark to Evaluate a Portfolio
What is an investment benchmark and how is it used to evaluate the risk and return in a portfolio.

What is the difference between a sharpe ratio and an information ratio?
Understand the meaning of the Sharpe ratio and the information ratio, and understand how they differ as tools for evaluating ... Read Answer >> 
Stocks with a positive alpha are considered to be underpriced ...
The correct answer is a): The riskadjusted return attempts to measure the risks taken to achieve a desired return. Alpha ... Read Answer >> 
What is the difference between capital investment decision and current asset decision?
Learn how capital investment decisions are longterm funding decisions, while current asset decisions are shortterm funding ... Read Answer >> 
What's the difference between absolute and relative return?
Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >> 
What is the difference between a company's annual return and its annualized return?
Understand the importance of calculating a company's annual return and its annualized return, and learn the differences between ... Read Answer >> 
What is the difference between the cost of capital and the discount rate?
Learn about the differences between the cost of capital and the discount rate as they relate to estimating a required return ... Read Answer >>