A measure of possible worst-case losses in excess of the average used in banking to calculate both capital adequacy requirements and certain performance measures, such as risk-adjusted return on capital (RAROC). It is usually based on the value-at-risk (VaR) methodology.
RAROC, or Risk-Adjusted Return on Capital, is a financial metric used to determine profitability considering the risk taken by a firm. It assesses the returns, adjusted for risk, on the capital invested.
RAROC is a performance measurement tool used by financial institutions to determine the risk-adjusted profitability of various units within the organization.
