What is a simple example of a risk/reward ratio in action?
Risk / Reward
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A typical example of a risk/reward ratio in action may be if someone wants to borrow $50 from you and pay you $100 at a later date. You will lose the $50 if the debt goes unpaid. But you will make twice the amount of your investment (a 2:1 risk/reward ratio). If the borrower agrees to pay you $150, the risk/reward ratio increases to 3:1. Investors favor risk/reward ratios in the 2:1 range when analyzing potential investments.