what does return on risk adjusted capital tell you 
return on risk adjusted capital rorac takes into account the capital at risk whether it be related to a project or company division allocated risk capital is the firm s capital adjusted for a maximum potential loss based on estimated future earnings distributions or the volatility of earnings companies use rorac to place greater emphasis on firm wide risk management for example different corporate divisions with unique managers can use rorac to quantify and maintain acceptable risk exposure levels this calculation is similar to risk adjusted return on capital raroc with rorac however the capital is adjusted for risk not the rate of return rorac is used when the risk varies depending on the capital asset being analyzed example of how to use roracassume a firm is evaluating two projects it has engaged in over the previous year and needs to decide which one to eliminate project a had total revenues of 100 000 and total expenses of 50 000 the total risk weighted assets involved in the project is 400 000 project b had total revenues of 200 000 and total expenses of 100 000 the total risk weighted assets involved in project b is 900 000 the rorac of the two projects is calculated as project a rorac 1 0 0 0 0 0 5 0 0 0 0 4 0 0 0 0 0 1 2 5 project b rorac 2 0 0 0 0 0 1 0 0 0 0 0 9 0 0 0 0 0 1 1 1 begin aligned text project a rorac frac 100 000 50 000 400 000 12 5 text project b rorac frac 200 000 100 000 900 000 11 1 end aligned project a rorac 400 000 100 000 50 000 12 5 project b rorac 900 000 200 000 100 000 11 1 even though project b had twice as much revenue as project a once the risk weighted capital of each project is taken into account it is clear that project a has a better rorac the difference between rorac and rarocrorac is similar to and easily confused with two other statistics risk adjusted return on capital raroc is usually defined as the ratio of risk adjusted return to economic capital in this calculation instead of adjusting the risk of the capital itself it is the risk of the return that is quantified and measured often the expected return of a project is divided by value at risk var to arrive at raroc another statistic similar to rorac is the risk adjusted return on risk adjusted capital rarorac this statistic is calculated by taking the risk adjusted return and dividing it by economic capital adjusting for diversification benefits it uses guidelines defined by the international risk standards covered in basel iii which is a set for reforms that are to be implemented by jan 1 2022 and is meant to improve the regulation supervision and risk management within the banking sector limitations of using return on risk adjusted capital roraccalculating the risk adjusted capital can be cumbersome as it requires understanding the value at risk calculation for related insight read more about how risk weighted assets are calculated based on capital risk 