1. What is Return on Risk-Adjusted Capital (RORAC)?

Definition: RORAC is a financial metric that measures the return on capital after adjusting for risk.

Purpose: It helps financial institutions evaluate performance while accounting for the risk taken to generate returns.

2. How Does the RORAC Formula Work?

The calculator uses the formula:

Where:

• \( RORAC \) — Return on risk-adjusted capital (percentage)
• \( R \) — Return (currency)
• \( C \) — Cost (currency)
• \( K_{adj} \) — Risk-adjusted capital (currency)

Explanation: The formula calculates the percentage return by dividing net income (return minus cost) by the risk-adjusted capital.

3. Importance of RORAC Calculation

Details: RORAC enables comparison of performance across different business units or investments while accounting for their varying risk profiles.

4. Using the Calculator

Tips: Enter the return amount, associated costs, and risk-adjusted capital. All values must be in the same currency.

5. Frequently Asked Questions (FAQ)

Q1: What's considered a good RORAC value?
A: This varies by industry, but generally higher values indicate better risk-adjusted performance.

Q2: How is risk-adjusted capital determined?
A: It's typically calculated using risk models that account for credit risk, market risk, and operational risk.

Q3: What's the difference between RORAC and RAROC?
A: RORAC uses actual returns while RAROC uses expected returns in the numerator.

Q4: Can RORAC be negative?
A: Yes, if costs exceed returns, resulting in negative performance.

Q5: What time period should be used for calculation?
A: Typically annual figures are used, but any consistent time period can be applied.