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2 results

  • 18 - Risk-Adjusted Measures of Profit and Capital Allocation

  • Mary R. Hardy, University of Waterloo, Ontario, David Saunders, University of Waterloo, Ontario
  • Book:
    Quantitative Enterprise Risk Management
    Published online:
    28 July 2022
    Print publication:
    05 May 2022, pp 511-555

  • Summary

    “In this chapter, we consider how traditional measures of profit, using return ratios, can be improved by considering the riskiness of the investment. The objective is to analyse which parts of the business are performing best relative to the risks involved, rather than simply comparing returns with no consideration of risk. In turn, this allows the business to decide where it should take on more risk, as the additional risk is justified by additional return, and where it should take on less.

    A key part of the risk budgeting exercise is the allocation of the organization’s economic capital to the individual business units. In the second part of this chapter, we describe different approaches to capital allocation, and assess their relative advantages and disadvantages.”