Measuring risk-adjusted performance

Michel Crouhy and Stuart M. Turnbull, Lee M. Wakeman

Abstract

ABSTRACT

Many banks follow the dictum of maximizing the risk-adjusted return on economic capital, subject to constraints imposed by regulatory requirements. The authors show that commonly employed methods may result in decisions that adversely affect shareholder value. They present an alternative methodology, adjusted RAROC, that corrects the inherent limitations of the existing methods.