Risk-reward and expected value
Payoff and probability must be considered together.
Risk-reward and expected value
| Concept | Explanation | |---|---| | Risk-reward ratio | Potential loss compared with potential gain. | | Win probability | Estimated chance of a profitable outcome. | | Expected value | Probability-weighted average gain or loss. | | Payoff asymmetry | Losses and gains have different magnitudes. | | Breakeven win rate | Minimum success rate required for a payoff structure. |
A 3:1 reward-to-risk opportunity is not attractive if the probability of success is extremely low. Payoff and probability must be considered together.