RISK-ADJUSTED RETURN ON CAPITAL - RAROC
An adjustment to the return on an investment that accounts for the element of risk. Risk-adjusted 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)*(risk-free rate) Expected loss = average anticipated loss over the measurement period
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