Return On Risk-Adjusted Capital - RORAC

Definition of 'Return On Risk-Adjusted 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.

Return On Risk-Adjusted Capital (RORAC)


Allocated risk capital = the firm's capital, adjusted for a maximum potential loss based on the probability of future returns or volatility of earnings.

Investopedia explains 'Return On Risk-Adjusted Capital - RORAC'




RORAC is used more as companies place greater emphasis on firm-wide risk management. For example, different corporate divisions with unique managers can use RORAC to quantify and maintain acceptable risk-exposure levels.

This calculation is similar to risk-adjusted 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.



comments powered by Disqus
Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  2. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
  3. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
  4. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by additional investment would not warrant the expense. A harvest strategy is employed when a line of business is considered to be a cash cow, meaning that the brand is mature and is unlikely to grow if more investment is added.
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes.
Trading Center