Risk-Reward Ratio
The risk-reward ratio is a measure used to compare the expected returns of an investment to the amount of risk undertaken to achieve those returns. It is calculated by dividing the expected return of an investment by the amount of risk taken to achieve that return. The higher the risk-reward ratio, the more attractive the investment is. The risk-reward ratio is used by investors to determine the potential return of an investment relative to the amount of risk taken.
History of the Risk-Reward Ratio
The concept of the risk-reward ratio has been around since the early days of finance. The idea was first introduced by the French mathematician and economist Antoine Augustin Cournot in 1838. Cournot proposed that the risk-reward ratio should be used to compare the expected returns of different investments. Since then, the risk-reward ratio has become an important tool for investors to evaluate the potential returns of an investment relative to the amount of risk taken.
Risk-Reward Ratio Table
| Investment | Risk | Reward | Risk-Reward Ratio |
|---|---|---|---|
| Stock A | High | High | 1:1 |
| Stock B | Low | Low | 1:1 |
| Stock C | High | Low | 1:2 |
| Stock D | Low | High | 2:1 |
Summary
The risk-reward ratio is a measure used to compare the expected returns of an investment to the amount of risk taken to achieve those returns. It is calculated by dividing the expected return of an investment by the amount of risk taken to achieve that return. The higher the risk-reward ratio, the more attractive the investment is. For more information on the risk-reward ratio, you can visit Investopedia, The Balance, and other financial websites.
See Also
- Risk-Adjusted Return
- Risk Aversion
- Risk Tolerance
- Risk Management
- Portfolio Risk
- Volatility
- Beta
- Sharpe Ratio
- Alpha
- Value at Risk
