Risk vs Reward Ratio

The risk vs reward ratio is a financial metric used to evaluate the potential return of an investment relative to its risk. It is calculated by dividing the potential profit by the potential loss of a trade or investment. A lower ratio indicates that the investment offers a higher potential return for a given level of risk, while a higher ratio suggests that the risk outweighs the potential reward. Investors use this ratio to determine whether the potential benefits of an investment justify the risks.

Example

An investment with a potential profit of $200 and a potential loss of $100 has a risk vs reward ratio of 1:2, meaning the investor stands to gain twice as much as they could lose.