How is risk-adjusted return on capital calculated?

The calculation of risk-adjusted return on capital aims to provide a deeper insight into how effectively a firm is generating profit relative to the amount of capital that is at risk. This is particularly important in evaluating the performance of investments or business operations where risk plays a significant role in determining outcomes.

The correct choice involves dividing the expected return by a measure of capital at risk, which can take into account various factors such as the volatility of returns or other risk measures like standard deviation. This metric allows investors to gauge not just the raw returns the capital generates but also how those returns relate to the risks assumed. Essentially, it helps assess whether the returns are sufficient to compensate for the risk that has been taken.

Other options, while related to financial metrics, do not address the concept of risk-adjusted returns effectively. Options such as return minus cost of capital focus only on the net return rather than incorporating a risk perspective. Similarly, gross profit relative to total revenue and net income relative to total assets do not provide a complete analysis of returns adjusted for risk, making them less relevant in this context.