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RORAC
RORAC
Formula
RORAC =
Value At Risk
Economic Capital
The amount of risk capital that an entity estimates in order
risks it takes on
Value at Risk
Value at risk can be defined as the worst loss that might
Example
Assume that an investor has EUR 1,000 to invest. The investment horizon is one year, after which the investor will sell the position. Two investment options are available: Equity 1 and Equity 2. Investment Options Annual return Equity 1 4% Equity 2 10%
Expected Income
40
100
Risk
2%
20%
Economic capital
20
200
Bibliography
Risk Management - Crouhy