Reward to Risk Ratio Calculator

Formula

The formula to calculate the reward-to-risk ratio is:

\[ RRR = \frac{ER}{ML} \]

Where:

$RRR$ is the reward-to-risk ratio
$ER$ is the expected return or reward (\$)
$ML$ is the maximum potential loss (\$)

What is Reward to Risk Ratio?

The Reward to Risk Ratio is a crucial metric used in financial analysis to assess the potential profitability of an investment relative to its associated risks. It provides a quantitative measure of the potential gain an investor can expect from an investment compared to the risk of losing their invested capital.

In simple terms, the Reward to Risk Ratio compares the potential reward or profit of an investment to the potential risk or loss. It is calculated by dividing the expected reward by the expected risk. A higher ratio indicates that the potential reward is greater than the potential risk, making the investment more attractive.

Example Calculations

Example 1:

Expected Return or Reward (ER) = $500
Maximum Potential Loss (ML) = $100

Using the formula:

\[ RRR = \frac{500}{100} = 5 \]

The Reward to Risk Ratio (RRR) is 5.

Example 2:

Expected Return or Reward (ER) = $200
Maximum Potential Loss (ML) = $50

Using the formula:

\[ RRR = \frac{200}{50} = 4 \]

The Reward to Risk Ratio (RRR) is 4.