Risk/Reward Ratio

The risk/reward ratio identifies the potential return an investor can expect to receive for each dollar they risk on a particular investment. Many investors use risk/reward ratios to evaluate the projected rewards of an investment with the level of risk they must incur in order to attain these returns. For example, an investment with a risk-to-reward ratio of 1:4 indicates that the investor is willing to risk $1 in exchange for the chance to make a $4 profit.