What is a 'Risk/Reward Ratio'
A risk/reward ratio is a ratio used by many investors to compare the expected returns of an investment to the amount of risk undertaken to capture these returns. This ratio is calculated mathematically by dividing the amount he or she stands to lose if the price moves in the unexpected direction (i.e. the risk) by the amount of profit the trader expects to have made when the position is closed (i.e. the reward).
BREAKING DOWN 'Risk/Reward Ratio'
Let's say a trader purchases 100 shares of XYZ Company at $20 and places a stoploss order at $15 to ensure that her losses will not exceed $500. Let's also assume that this trader believes that the price of XYZ will reach $30 in the next few months. In this case, the trader is willing to risk $5 per share to make an expected return of $10 per share after closing her position. Since the trader stands to make double the amount that she has risked, she would be said to have a 1:2 risk/reward ratio on that particular trade. The optimal risk/reward ratio differs widely among trading strategies. Some trial and error is usually required to determine which ratio is best for a given trading strategy.

Current Ratio
The current ratio is a liquidity ratio measuring a company's ... 
Ratio Analysis
A ratio analysis is a quantitative analysis of information contained ... 
Combined Ratio
A measure of profitability used by an insurance company to indicate ... 
Key Ratio
A mathematical ratio that illustrates and summarizes the current ... 
Bond Ratio
A financial ratio that expresses the leverage of a bond issuer. ... 
Sterling Ratio
A ratio used mainly in the context of hedge funds. This riskreward ...

Managing Wealth
Calculating the Risk/Reward Ratio
Investors use risk/reward ratios to compare an investmentâ€™s expected return to the risk taken to capture those returns. 
Managing Wealth
Calculating Risk And Reward
Simply put, investing requires a degree of risk, and the bigger that risk, the higher the gain should be. 
Managing Wealth
Calculating Risk and Reward
Investing money into the investment markets has a high degree of risk, and if you're going to take the risk, the amount of money you stand to gain needs to be big. 
Trading
6 Basic Financial Ratios And What They Reveal
These formulas can help you pick better stocks for your portfolio once you learn how to use them. 
Markets
Analyze Investments Quickly With Ratios
Make informed decisions about your investments with these easy equations. 
Investing
Efficiency Ratio
There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ... 
Investing
5 Basic Financial Ratios And What They Reveal
Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know. 
Investing
Financial Ratios to Spot Companies Headed for Bankruptcy
Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy. 
Trading
Ratio Analysis
Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ... 
Investing
How To Find P/E And PEG Ratios
If these numbers have you in the dark, these easy calculations should help light the way.

What role does ratio analysis play in valuing a company?
Learn about the role of ratio analysis in determining company value, including some of the most common ratios used by modern ... Read Answer >> 
How do stock dividends affect the retained earnings account?
Understand the difference between financial ratio analysis and accounting ratio analysis. Learn why ratio analysis is important ... Read Answer >> 
What is the difference between the loss ratio and combined ratio?
Learn about the loss ratio and combined ratio, what the two ratios measure and the main difference between the loss ratio ... Read Answer >> 
What is the difference between efficiency ratios and profitability ratios?
Learn about efficiency and profitability ratios, what these ratios measure and the main difference between efficiency and ... Read Answer >> 
How do I use ratios to perform a financial analysis?
Learn which ratios are used in fundamental analysis. Find out how analysts measure company performance and financial health ... Read Answer >> 
To what extent should you take a company's liquidity ratio into account before investing ...
Find out how important it is for an investor to know a company's liquidity ratio before deciding to invest, and why relying ... Read Answer >>