RAROC

RAROC is a fancy way of saying "risk-adjusted return on capital". Think of it like a game we play where we try to make the most money while also being safe.

Let's say that you want to open a lemonade stand. You have two choices for where to put it. You can put it in a really busy area where lots of people will want to buy your lemonade, but it costs a lot of money to rent the space. Or you can put it in a quieter area where it's cheaper to rent but you might not make as much money because fewer people will come.

If we only look at how much money you make, it might seem like the busy area is the best choice. But we also have to think about the risks. What if it rains one day and fewer people come to buy your lemonade? In the busy area, you might lose a lot of money because you're spending so much on rent. But in the quieter area, you might not make as much money that day, but you won't lose as much either.

So RAROC helps us figure out if we're making the right choice. We look at how much money we're making (the return) but we also look at how risky it is (the risk). We want to make sure we're making the most money while also being safe. And that's what RAROC is all about!