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.

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