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 relative to the risk taken.

2. How Does the RORAC Calculator Work?

The calculator uses the formula:

Where:

• \( RORAC \) — Return on risk-adjusted capital (percentage)
• \( R \) — Total return from investment (USD)
• \( C \) — Total cost of investment (USD)
• \( K_{adj} \) — Risk-adjusted capital (USD)

Explanation: The net return (R - C) is divided by the risk-adjusted capital to determine the percentage return per unit of risk.

3. Importance of RORAC in Stock Investing

Details: RORAC helps compare investments with different risk profiles and ensures capital is allocated to the most efficient risk-adjusted opportunities.

4. Using the Calculator

Tips: Enter the total return, total costs, and risk-adjusted capital amounts in USD. The risk-adjusted capital should be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What's considered a good RORAC value?
A: Generally, higher values are better, but acceptable RORAC varies by industry and risk tolerance (typically > 15% is good for stocks).

Q2: How is risk-adjusted capital determined?
A: It's calculated based on the risk profile of the investment, often using Value at Risk (VaR) or other risk models.

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

Q4: Can RORAC be negative?
A: Yes, if costs exceed returns (R - C is negative), indicating a loss on the investment.

Q5: How often should RORAC be calculated?
A: Typically calculated periodically (quarterly or annually) and when making new investment decisions.