DEFINITION of 'Return On RiskAdjusted Capital  RORAC'
A rate of return used in financial analysis, whereby riskier projects and investments are evaluated based on the capital at risk. RORAC makes it easier to compare and contrast projects with different risk profiles.
Allocated risk capital = the firm's capital, adjusted for a maximum potential loss based on the probability of future returns or volatility of earnings.
BREAKING DOWN 'Return On RiskAdjusted Capital  RORAC'
RORAC is used more as companies place greater emphasis on firmwide risk management. For example, different corporate divisions with unique managers can use RORAC to quantify and maintain acceptable riskexposure levels.
This calculation is similar to riskadjusted return on capital (RAROC); however, with RORAC, the capital is adjusted for risk, not the rate of return. RORAC is used when the risk varies depending on the capital asset being analyzed.

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