What is the reward-to-risk ratio?

The reward-to-risk ratio is a financial metric that compares the expected returns on an investment to the level of risk associated with that investment. It serves as an important measure for investors when evaluating the potential profitability of an investment relative to the risks they are taking. The concept is fundamentally about assessing how much return an investor can expect for each unit of risk incurred.

Choosing the expected gain per unit of risk accurately captures this idea. In financial terms, this often refers to ratios such as the Sharpe Ratio, which measures the excess return per unit of standard deviation (risk), demonstrating how effectively the investment is performing relative to the risk involved.

Other options do not align with the definition of the reward-to-risk ratio. The actual gain per unit of investment speaks to returns without considering the risk element, while trends of market returns focus on historical performance rather than a direct comparison with risk. Lastly, simply comparing the amount invested versus the amount earned provides a snapshot of profitability but lacks the essential component of risk evaluation that is central to calculating the reward-to-risk ratio.