What is a risk reward ratio?

The risk/reward ratio is used by traders and investors to manage their capital and risk of loss. The ratio helps assess the expected return and risk of a given trade. In general, the greater the risk, the greater the expected return demanded. An appropriate risk reward ratio tends to be anything greater than 1:3.

What is a risk-adjusted return?

A risk-adjusted return measures an investment's return after considering the degree of risk taken to achieve it. There are several methods for evaluating risk-adjusting performance, such as the Sharpe and Treynor ratios, alpha, beta, and standard deviation, with each yielding a slightly different result.

Are returns a reward for taking risk?

Returns are the reward for taking risk: when there will be no risk, there will be no profits either. This article discusses the Sharpe ratio, Treynor ratio, Information Ratio, Jensen’s alpha and the Kappa indices, which are all measures to evaluate risk adjusted performance.

What are risk adjusted performance measures?

This article discusses the Sharpe ratio, Treynor ratio, Information Ratio, Jensen’s alpha and the Kappa indices, which are all measures to evaluate risk adjusted performance. A key lesson for risk managers is always that returns mean nothing unless put side by side with the risk undertaken. Risk adjusted performance measures do just that.