Sell-IT is an on-line retail business and a subsidiary of Trade Corp. Its computer systems have suffered a number of significant recent failures. The CFO assesses that the impact of future such events is forecast to result in a reduction in value of $18,000 over a full year and that the statistical patterns of the potential volatility, measured as the standard deviation of the firms value, could be $900,000 per annum. The projected annual profit of Sell-IT, paid to Trade Corp at the end of the year as a dividend, is $136,250. Trade Corps cost of funds is 5.5%pa.

What is Trade Corps Risk-Adjusted Return on Capital (RAROC; rounded to 1 decimal place) on its investment in Sell-IT, using the VaR that you calculated is 1485000?

Z value at 95% confidence level = 1.65

Annual value at risk = Z value x standard deviation = 1.65 x 900000 = 1485000