What is the risk-return ratio?

Views 36KAug 9, 2023

Key points

● The risk-return ratio is an indicator that investors measure the expected income and losses in investments and transactions.

● The risk-return ratio helps investors manage their trading risks and mindset.

● The risk-return ratio should be used in conjunction with other risk management ratios to measure the risk of a transaction more comprehensively.

Understand the risk-return ratio

The risk-return ratio, also known as the Rmax R ratio, is an indicator that compares the potential profit of a transaction with the potential loss. The risk-return ratio marks the expected return for every dollar of risk that investors invest.

Many investors use risk-return ratios to compare the expected return on an investment with the amount of risk they have to bear in order to achieve these returns.

Consider the following example: an investment with a return on risk of 1:7 shows that an investor is willing to take a risk of $1 in order to get a return of $7. Alternatively, the 1:3 risk-return ratio indicates that investors expect a return of $3 for every $1 invested.

In many cases, investors find that the ideal risk-to-return ratio for their investments is about 1:3, that is, for each additional unit of risk, they will get an expected return of 3 units. Investors can manage the risk-return ratio more directly by using derivatives such as stop-loss orders and put options.

The risk / return ratio is often used as a measure when trading individual stocks. The optimal risk-return ratio varies widely among different trading strategies. Investors usually need some trial and error methods to determine which ratio is most suitable for a given trading strategy.

The limitation of risk-return ratio

Although the risk-return ratio represents the pros and cons of a transaction, it doesn't tell you everything about the deal. It is often used in conjunction with other risk management indicators, such as the win / loss ratio and break-even. Investors should consider different kinds of indicators and technical indicators and make cautious investments.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.