DEFINITION of 'Risk/Reward Ratio'
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).
INVESTOPEDIA EXPLAINS '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.

StopLoss Order
An order placed with a broker to sell a security when it reaches ... 
Expected Return
The amount one would anticipate receiving on an investment that ... 
Return
The gain or loss of a security in a particular period. The return ... 
Risk
The chance that an investment's actual return will be different ... 
Risk Management
The process of identification, analysis and either acceptance ... 
Net Premiums Written To Policyholder ...
A ratio of an insurance company’s gross premiums written less ...

Bonds & Fixed Income
Find The Highest Returns With The Sharpe ...

Bonds & Fixed Income
Why Stocks Outperform Bonds

Options & Futures
Minimize Risk With The Long Collar

Bonds & Fixed Income
Equity Premiums: Looking Back And Looking ...