Enter the expected monetary return and the maximum possible loss into the calculator to determine the reward to risk ratio.
Reward to Risk Ratio Formula
The following formula is used to calculate a reward to risk ratio.
RRR = ER / ML
- Where RRR is the reward to risk ratio
- ER is the expected return or reward ($)
- ML is the maximum potential loss ($)
Reward to Risk Ratio Definition
A reward to risk ratio is a measure of the ratio of a possible monetary reward to the potential monetary loss of a given investment. In other words, the ratio of potential upside to potential downside.
Reward to Risk Ratio Example
How to calculate reward to risk ratio?
- First, determine the potential or expected return.
This can either be the maximum expected monetary gain, or the most likely expected return.
- Next, determine the potential maximum loss.
For example, if you had a 50$ investment, the maximum loss is likely 50$.
- Finally, calculate the reward to risk ratio.
Calculate the RRR using the equation above.
This answer depends entirely on your risk tolerance, but a 2:1 reward to risk ratio is often considered the minimum ratio for considering long term investments.