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

Definition: RORAC is a financial metric that measures the return on capital while accounting for the risk associated with that capital.

Purpose: It helps financial institutions and investors evaluate performance by considering both returns and the risk taken to achieve those returns.

2. How Does the RORAC Calculator Work?

The calculator uses the formula:

Where:

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

Explanation: The net return (return minus cost) is divided by the risk-adjusted capital to determine the percentage return relative to the risk taken.

3. Importance of RORAC Calculation

Details: RORAC helps compare the profitability of different investments or business units while accounting for their varying risk profiles.

4. Using the Calculator

Tips: Enter the return amount, associated costs, and risk-adjusted capital amount. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's considered a good RORAC value?
A: A good RORAC depends on industry benchmarks, but generally values above 10-15% are considered strong.

Q2: How is risk-adjusted capital determined?
A: It's typically calculated based on regulatory requirements or internal risk models considering credit, market, and operational risks.

Q3: What's the difference between RORAC and RAROC?
A: RORAC uses risk-adjusted capital in the denominator, while RAROC adjusts both numerator and denominator for risk.

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

Q5: What industries use RORAC most?
A: Primarily used in banking, insurance, and investment management to evaluate risk-adjusted performance.