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Risk Adjusted Return on Capital - RAROC
What does it mean?
In financial analysis, riskier projects and investments must be evaluated differently from their riskless counterparts. By discounting risky cashflows against less risky cashflows RAROC accounts for changes in the profile of the investment.
In Other Words...
In general, the higher the risk, the higher the return. Thus, when companies need to compare and contrast two different projects or investments, it is important to take into account these possibilities.
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Related Terms
CAPM | Finance | Jensen's Measure | Risk Free Rate | ROI
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