Risk-adjusted return on capital is an index to measure income risk. It is an effective tool to measure financial performance after risk adjustment. Among different enterprises/departments, it provides a unified standard to measure income risk-adjusted return on capital and its related concepts.

Such as return on venture capital and return on risk-adjusted capital. RAROC, as the main index to measure risk and return, is mainly used in banking and insurance. In short, RAROC refers to the ratio of risk-adjusted rate of return to venture capital.

Extended data:

Because economic profit considers the cost of equity, it can be used to further explain RAROC. Economic profit is also the expected income of shareholders, which is equivalent to the opportunity cost of shareholders buying shares in other banks, so such a rate of return is not only needed by the market.

It is also used to measure whether it brings benefits to shareholders. Economic profit is used to measure whether the company's operating return exceeds the cost of equity. If the company's operating return exceeds its share capital, it will bring benefits to shareholders.

On the contrary, if the company's operating return is lower than equity, the shareholder value will be damaged. At this time, banks must find a more effective way to allocate capital.

Baidu encyclopedia -—RAROC