MANAGEMENT

Detailed explanation-1: -A comparison of the shareholders’ required rate of return (commonly referred to as the hurdle rate) with RAROC allows a financial institution to find out if an asset or a line of business is creating value for its shareholders.

Detailed explanation-2: -Here is the formula: Cost of capital + risk premium = hurdle rate. For example, if an investor’s cost of capital is 5%, and the risk premium for a specific investment is 3%, the hurdle rate would be 5% plus 3% or 8%.

Detailed explanation-3: -RORAC is Return on Risk-Adjusted Capital. RAROC is Risk-Adjusted Return on Capital. Both of these five-letter abbreviations are a step up from ROE. This is natural, I suppose, since ROE, meaning Return on Equity of course, is merely a three-letter profitability ratio.

Detailed explanation-4: -RAROC is also referred to as a profitability-measurement framework, based on risk, that allows analysts to examine a company’s financial performance and establish a steady view of profitability across business sectors and industries.