Inverse of RAROC....

[sridhar]

Hi David,

In one of your numerous min-screencasts, I remember you mentioning some risk measure -- that is conceptually at least the reverse of RAROC. You called it the "return adjusted measure...." of something.... And you mentioned how it was like the reverse of the risk-adjusted return on capital.This is like searching for a book without knowing the author or the title...But it is stuck in my head and some basic rooting around your site or my notes have so far not yielded results.

Do you know what I am referring to? This is the probably the kind of question you can do without -- at this stage. But with your encyclopedic knowledge of the FRM jungle, perhaps you know what I speak of? It is like a song that is stuck in my head....

--sridhar

 

[David Harper CFA FRM]

Hi sridhar,

I know that feeling, having something stuck in my head...I don't know where i mentioned this, but i think i know what you mean: In Wilmott's reading, he gives two VaRs, a relative VaR and an absolute VaR (to use Jorion's terms). Relative VaR is just the risk: volatility*(critical value). Absolute VaR nets out the expected return: - expected return + volatility*(critical value). At some point, i started to think of the latter as return-adjusted risk because the VaR (risk) is adjusted for the benefit of a return. e.g., a risky asset may have both high risk and high return. The relative VaR will only count the high risk, the absolute VaR will give some credit for the high expected return. I think that's what you are looking for, sorry if it probably not as fulfilling as recalling a nice song...

David