Risk Of Ruin

AAA

DEFINITION of 'Risk Of Ruin'

The probability of an individual losing sufficient trading or gambling money (known as capital base) to the point at which continuing on is no longer considered an option to recover losses.

Risk of ruin is calculated by taking into account the probability of winning (or making money on a trade), the probability of incurring losses, and the portion of an individual's capital base that is in play or at risk. Also known as the "probability of ruin".

INVESTOPEDIA EXPLAINS 'Risk Of Ruin'

Risk of ruin need not result in bankruptcy (although it often does), but rather the point at which continuing on would be unwise. It signifies a risk more relevant in trading and gambling, where there is a high probability of losing an entire bet or trade.

The risk becomes even greater for individuals who trade large percentages of their accounts. For example, say an investor has $3,000 and purchases $3,000 worth of call options. If there is a 40% chance that the options will not be exercised, then the risk of ruin is 40%.

RELATED TERMS
  1. War Risk Insurance

    A policy that provides financial protection against losses sustained ...
  2. Headline Risk

    The possibility that a news story will adversely affect a stock's ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  4. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  5. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  6. Preservation Of Capital

    An investment strategy where the primary goal is to preserve ...
Related Articles
  1. Protecting Your Retirement Assets
    Retirement

    Protecting Your Retirement Assets

  2. Introduction To Investment Diversification
    Investing Basics

    Introduction To Investment Diversification

  3. Cut Down Option Risk With Covered Calls
    Options & Futures

    Cut Down Option Risk With Covered Calls

  4. Using Logic To Examine Risk
    Active Trading Fundamentals

    Using Logic To Examine Risk

comments powered by Disqus
Hot Definitions
  1. 80-10-10 Mortgage

    A mortgage transaction in which a first and second mortgage are simultaneously originated. The first position lien has an ...
  2. Passive ETF

    One of two types of exchange-traded funds (ETFs) available for investors. Passive ETFs are index funds that track a specific ...
  3. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another ...
  4. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  5. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center