<p>Risk-Adjusted Return On Capital (RAROC) is a performance metric that quantifies the return on capital invested, adjusted for the risk incurred. It's a crucial tool for traders to evaluate the efficiency of their investments, considering both potential gains and potential losses.</p>

<h2>How It Works</h2>
<p>RAROC is calculated as follows:</p>
<table>
<tbody>
<tr>
<td><strong>Expected Return</strong></td>
<td>minus</td>
<td><strong>Risk-Free Rate</strong></td>
<td>divided by</td>
<td><strong>Standard Deviation of Returns</strong></td>
</tr>
</tbody>
</table>
<p>The expected return is the anticipated profit from an investment, the risk-free rate is the return on a risk-free investment (like government bonds), and the standard deviation of returns measures the investment's volatility.</p>

<h2>Why It Matters for Traders</h2>
<p>RAROC helps traders make informed decisions by:</p>
<ul>
<li>Comparing different investments: A higher RAROC indicates a better risk-adjusted return.</li>
<li>Identifying over- or underpriced assets: If an asset's RAROC is significantly higher or lower than its peers, it might be a buying or selling opportunity.</li>
<li>Setting risk limits: By understanding the RAROC of their portfolio, traders can set appropriate risk limits and monitor their exposure.</li>
</ul>

<h2>Example</h2>
<p>Consider two stocks, A and B, with the following characteristics:</p>
<table>
<tbody>
<tr>
<td><strong>Stock</strong></td>
<td><strong>Expected Return</strong></td>
<td><strong>Risk-Free Rate</strong></td>
<td><strong>Standard Deviation of Returns</strong></td>
<td><strong>RAROC</strong></td>
</tr>
<tr>
<td>A</td>
<td>15%</td>
<td>3%</td>
<td>10%</td>
<td>12%</td>
</tr>
<tr>
<td>B</td>
<td>20%</td>
<td>3%</td>
<td>20%</td>
<td>6%</td>
</tr>
</tbody>
</table>
<p>Stock A has a higher RAROC, indicating a better risk-adjusted return despite its lower expected return.</p>

<h2>Key Takeaways</h2>
<ul>
<li><strong>RAROC</strong> helps traders evaluate investments considering both risk and return.</li>
<li>It's calculated as <strong>Expected Return</strong> minus <strong>Risk-Free Rate</strong> divided by <strong>Standard Deviation of Returns</strong>.</li>
<li>Traders can use RAROC to compare investments, identify opportunities, and set risk limits.</li>
<li>RAROC is supported in MetaTrader 5, allowing traders to easily calculate and monitor this crucial metric.</li>
</ul>