Risk-Adjusted Return on Capital (RAROC) enables organizations to compare the performance of different business units or investments on a consistent basis by incorporating the cost of risk. The calculation divides expected return by economic capital allocated to cover potential losses at a specified confidence level. This metric helps senior management allocate resources to activities generating the highest risk-adjusted returns and supports pricing decisions. A commercial bank might use RAROC to determine that its corporate lending division generates 18% return on allocated capital while its retail mortgage business yields only 12%, informing strategic capital deployment.