A technique of risk analysis that assumes a higher return for a riskier project than a less risky one.
A measurement tool that enables management to allocate capital, and the related cost of capital, in respect of credit, market and operational risk by type of transaction, client and line of business. This facilitates the deployment of capital to business units that can provide the maximum shareholder value on the capital invested.
(RAROC) Economic approach that includes a series of complex calculations that is used to measure returns based on the risk-adjusted capital of a financial institution. Many financial institutions use RAROC to provide a better measure of profitability based on the economic capital (capital to support the incurred risks of the institution).