Risk-adjusted return

Return measured relative to the risk taken to earn it. RAROC divides risk-adjusted profit by economic capital.

Where you will meet it

Risk-adjusted return comes up in 12 learning outcome notes across the FRM syllabus. A few of them:

• Banks
  FRM Part I · Financial markets and products

  “A common measure is RAROC = (revenue − costs − expected loss) ÷ economic capital.”

• The Governance of Risk Management
  FRM Part I · Foundations of risk management

  “A common risk-adjusted measure is RAROC = (revenue − costs − expected loss) ÷ economic capital.”

• Measuring Credit Risk
  FRM Part I · Valuation and risk models

  “Economic capital is bank specific and drives pricing, performance measurement such as RAROC, and capital allocation.”

• Fundamentals of Credit Risk
  FRM Part II · Credit risk measurement and management

  “Accept a risk when return after expected loss, costs and capital charge, for example measured by RAROC, exceeds the hurdle rate.”

See also

Economic capital

All terms beginning with R · FRM glossary

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