How do I solve a risk and return equation?
submitted by kim

wilma

You basically need to figure out how much return you're expecting and how risky it is.

You can do this by calculating the average return and then measuring how much returns vary. Once you have both, you can plug them into your formula to see if the return justifies the risk.

inrubble

"Risk" is kind of subjective. It's an estimate, because you don't have every piece of information you'd need to know how an investment will turn out. Otherwise there would be no risk.

That being said, to do some risk and return calculation, you can start by identifying the expected return. That would involve calculating the weighted average of possible outcomes based on probabilities. Like I said, you're estimating. You have to use probability, since you don't have a solid knowledge of the outcome.

Next, you can measure risk using metrics like standard deviation or variance. Maybe look at formulas like the Sharpe Ratio. Do you have a specific risk and return equation in mind?