Risk adjusted return on capital (RAROC)

Measure of risk-adjusted profitability that enables management to allocate capital, and the related cost of capital, in respect of credit, market and operational risk by type of transaction, client and line of business. The analysis takes into account the potential risks of the compared investments, i.e. the investment that has a higher risk profile needs to offer a higher return to compensate for that risk. It refers to a measure of the portfolio return per unit of risk taken (i.e. return divided by standard deviation), in order to compare returns on an apples-to-apples basis.
RAROC facilitates the deployment of capital to business units that can provide the maximum shareholder value on the capital invested.