I was just wondering if someone could enlighten me on the ways of RAROC? I think it has to do with economic profit and the cost of capital. Is there an easy formula to know? Thanks in advance
Have you looked it up on the web? Gotta be a ton of refernecs to it. It’s about standardizing return by risk taken.
risk adjusted return on capital (RAROC) return on risk adjusted capital (RORAC) risk adjusted return on risk adjusted capital (RARORAC) three different measures, based on where you adjust the raw number based on risk of that raw number. RARORAC is the most complete as it factors in both expected and unexpected losses. you adjust the return by taking out the expected losses. you adjust the capital by factoring in unexpected losses based on VAR. if either one is done, but not both, you get RAROC or RORAC. PRM handbook exam 3, chapter 0 - read it