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vihaanmekala-art

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How to find the risk-to-reward of a stock

In order to find the risk-to-reward of a stock, you use a simple metric called the Sharpe ratio. It is calculated as (r-rf)/rs.
r = returns
rf = risk-free rate (Typically US Treasury Bonds)
rs = standard deviation, also known as volatility.

The higher the Sharpe ratio, the better bang you get for risk taken.
E.g: If NVDA returns 20%, the risk-free rate is 3%, and volatility was 10, then the Sharpe ratio would be 1.7.
Tools used - https://stochastics.vercel.app/

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