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.
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.