1. What is a Risk Return Ratio Calculator?

Definition: This calculator determines the risk-return ratio (RRR), which measures the expected return per unit of risk.

Purpose: It helps investors assess the efficiency of an investment by comparing its expected return to its volatility.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( RRR \) — Risk-return ratio (dimensionless)
• \( R \) — Expected return (currency, e.g., USD)
• \( \sigma \) — Standard deviation of returns (currency, e.g., USD)

Explanation: The higher the RRR, the better the investment's return relative to its risk. A ratio of 1 means return equals risk.

3. Importance of Risk Return Ratio

Details: RRR helps investors compare different investment opportunities and make informed decisions about risk management.

4. Using the Calculator

Tips: Enter the expected return and standard deviation in the same currency (e.g., USD). Both values must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good risk-return ratio?
A: Generally, ratios above 1 are desirable, but this varies by investor risk tolerance and market conditions.

Q2: How do I find the standard deviation?
A: Calculate from historical returns or use statistical software. For stocks, it's often available from financial data providers.

Q3: Can RRR be negative?
A: No, since both inputs should be positive values. Negative returns would require different risk metrics.

Q4: How does this differ from Sharpe ratio?
A: Sharpe ratio uses excess return over risk-free rate, while RRR uses raw return. Both measure return per unit of risk.

Q5: When would I use RRR?
A: When comparing investments with similar characteristics or assessing standalone investment efficiency.