What Is the Essential Idea Behind Risk-Adjusted Return on Capital

question 54

Multiple Choice

What is the essential idea behind Risk-adjusted return on capital (RAROC) models?

• A)Evaluating the actual or contractually promised annual ROA on a loan.
• B)Analyzing historic or past default risk experience.
• C)Balancing expected interest and fee income less the cost of funds against the loan's expected risk.
• D)Extracting expected default rates from the current term structure of interest rates.

---

Definitions:

Risk-Free Asset

An investment that is expected to return its full face value with zero risk of financial loss.

Required Rate of Return

The minimum annual percentage earned by an investment that will entice individuals or companies to put money into a particular security or project.

Total Risk

Represents the full spectrum of all types of risk associated with an investment, including both systematic and unsystematic risks.

Market Risk

The risk of losses in investments caused by factors that affect the entire market or economy, such as geopolitical events or changes in interest rates.