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Risk-adjusted return on capital (RAROC)

A target return on equity (ROE) measure in which the numerator is reduced depending on the risk associated with the instrument or project. This is a term used in the financial services industry and in enterprise risk management (ERM). In the insurance industry, RAROC is typically employed to evaluate the relative performance of business segments that have different levels of risk; the different levels of risk are reflected in the denominator. Evaluating financial performance under RAROC calls for comparison to a benchmark return; when the benchmark return is risk-adjusted, the result is similar to risk-adjusted return on risk-adjusted capital (RARORAC), though the term RAROC is still applied.