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      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 investments
      A Only i Correct Answer Incorrect Answer
      B Only (i) and (ii) Correct Answer Incorrect Answer
      C Only (i) and (iii) Correct Answer Incorrect Answer
      D Only (ii) and (iii) Correct Answer Incorrect Answer
      E (i), (ii) and (iii) Correct Answer Incorrect Answer

      Solution

      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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