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 involved in an investment.

Purpose: It helps investors and financial analysts evaluate the profitability of investments after adjusting for their risk profiles.

2. How Does the RORAC Calculator Work?

The calculator uses the formula:

Where:

• \( RORAC \) — Return on risk-adjusted capital (%)
• \( R \) — Total return from investment (USD)
• \( C \) — Total costs associated with investment (USD)
• \( K_{adj} \) — Risk-adjusted capital (USD)

Explanation: The net return (R - C) is divided by the risk-adjusted capital and multiplied by 100 to get a percentage value.

3. Importance of RORAC in Investment Analysis

Details: RORAC provides a standardized way to compare different investments by accounting for their varying risk levels, helping make better capital allocation decisions.

4. Using the Calculator

Tips: Enter the total return, total costs, and risk-adjusted capital. All values must be in the same currency (default USD). Risk-adjusted capital must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What's considered a good RORAC value?
A: This varies by industry, but generally a RORAC above 15% is considered good, though it should exceed the company's cost of capital.

Q2: How is risk-adjusted capital determined?
A: It's typically calculated using risk models that account for potential losses (e.g., Value at Risk models or regulatory capital requirements).

Q3: What's the difference between RORAC and RAROC?
A: RORAC focuses on capital allocation, while RAROC (Risk-Adjusted Return on Capital) is more comprehensive, including expected losses.

Q4: Can RORAC be negative?
A: Yes, if costs exceed returns, resulting in a negative value indicating a loss on the investment.

Q5: How often should RORAC be calculated?
A: Typically calculated quarterly or annually, but may be done more frequently for active portfolio management.