Question
Which of the following is correct regarding Risk
Adjusted Returns on investment? I. It is the process where a Risk in a business or investment, is netted against the returns from it II. Higher the Risk Adjusted Return on capital higher is the reward for investors III. The investors would have more performance for such investmentsSolution
Risk Adjusted Return On Capital: It gives us a clear understanding of risk and reward on capital used and, therefore, it provides a good measure of performance across all business units and business activities. It is defined as a ratio of expected risk adjusted net income, net of taxes to economic capital expressed in percentage. If a bank’s RAROC is higher than the cost of bank’s equity, then the bank is deemed to be adding value to shareholders (economic value added).
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