Return on Risk-Adjusted Capital (RORAC)

Return on Risk-Adjusted Capital (RORAC) is a measure of the profitability of an investment or business, taking into account the risk involved. It is calculated by dividing the net income by the risk-adjusted capital.

The risk-adjusted capital is the amount of capital that is required to generate the desired return. It is calculated by multiplying the expected return by the riskiness of the investment.

The expected return is the average return that the investment is expected to generate over time. The riskiness of the investment is measured by the standard deviation of the returns.

The standard deviation is a measure of how much the returns vary from the expected return. A high standard deviation indicates that the returns are more volatile, and therefore riskier.

RORAC is a useful measure for comparing investments or businesses with different levels of risk. It can help investors and businesses to make decisions about which investments or businesses to invest in or start.

For example, an investment with a high RORAC and a low risk would be a better investment than an investment with a low RORAC and a high risk.

RORAC can also be used to measure the performance of an investment or business over time. By comparing the RORAC of an investment or business over time, it is possible to see how it is performing relative to its peers.

RORAC is a valuable tool for investors and businesses. It can be used to make decisions about which investments or businesses to invest in or start, and it can be used to measure the performance of an investment or business over time.