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Calculating Risk and Reward

The article from Investopedia titled "Calculating Risk and Reward" discusses the importance of understanding the risk-reward ratio in investment decisions. It explains that the risk-reward ratio helps investors compare the expected returns of an investment against the amount of risk they must undertake to earn these returns. The article outlines how to calculate this ratio by dividing the amount of potential loss (risk) by the potential gain (reward). It emphasizes that a lower risk-reward ratio might be acceptable for safer investments, while higher ratios might be necessary for riskier assets. The piece also covers the concept of the Sharpe Ratio, which adjusts returns for risk, and discusses how investors can use these metrics to make more informed decisions, balancing potential profits with the likelihood of losses. Additionally, it touches on the psychological aspects of risk tolerance and how it influences investment choices, suggesting that understanding one's own risk tolerance is crucial before applying these calculations.

Read the Full Investopedia Article at:
[ https://www.investopedia.com/articles/stocks/11/calculating-risk-reward.asp ]