Risk-adjusted return on capital (RAROC) is a risk-adjusted measure of the return on investment. It does this by accounting for any expected losses and income generated by capital, with the assumption that riskier projects should be accompanied by higher expected returns.

What is RAROC formula?

RAROC = (Revenues – Costs – Expected Losses) / Economic Capital. Revenues in the equation refer to bank revenues in the form of interest and transaction-related fees. Therefore, for the loan or the credit portfolio that the bank holds, the annual revenue would be an annualized value of the bank’s interest earning.

What is the difference between RAROC and Rorac?

RORAC is Net Income divided by Allocated Capital. … RAROC is Risk-Adjusted Net Income divided by Allocated Capital. RAROC does add risk-adjustment to the numerator, general ledger Net Income, by taking into account the unmitigated market risk embedded in an asset or liability.