Given a risk-adjusted return of $80,000, a loan amount of $3,000,000, a capital requirement of 10%, and a capital ratio of 75%, what is the RAROC?

To determine the Risk-Adjusted Return on Capital (RAROC), the formula used is:

RAROC = Risk-Adjusted Return / Economic Capital

In this scenario, the risk-adjusted return is $80,000, and we need to calculate economic capital. Economic capital is determined by applying the capital requirement to the loan amount.

First, calculate the economic capital:

Economic Capital = Loan Amount * Capital Requirement

= $3,000,000 * 10%

= $300,000

Now, we can calculate RAROC using the values derived:

RAROC = $80,000 / $300,000

= 0.2667 or 26.67%

However, the capital ratio is also provided, which suggests we need to use it to find the capital available for use. The capital ratio indicates how much of the loan amount is covered by available capital:

Available Capital = Loan Amount * Capital Ratio

= $3,000,000 * 75%

= $2,250,000

Now we can recalculate RAROC using the available capital:

RAROC = $80,000 / $2,250,000

= 0.03556 or 3.56%

Upon reviewing the