Answer: If a business unit's cost of equity is greater than its RAROC, then the business unit is not adding value to shareholders.

## Explanation Let's evaluate each statement: **Statement A: "In the context of performance measurement, RAROC uses accounting profits."** - **INCORRECT** - RAROC uses economic profits, not accounting profits. Economic profits adjust for expected losses and risk, while accounting profits do not properly account for risk. **Statement B: "In the numerator of the RAROC equation, expected loss is added to the return."** - **INCORRECT** - Expected loss is **subtracted** from the return in the RAROC numerator, not added. The formula is: RAROC = (Revenue - Expected Loss - Expenses - Funding Cost + Return on Economic Capital) / Economic Capital **Statement C: "If a business unit's cost of equity is greater than its RAROC, then the business unit is not adding value to shareholders."** - **CORRECT** - This is the fundamental principle of RAROC. When RAROC exceeds the cost of equity, the business unit creates shareholder value. When RAROC is less than the cost of equity, the business unit destroys shareholder value. The correct answer is **C**.

Author: LeetQuiz .