Courses / Risk Reward

Risk Reward

18 Lessons | 4 Quizzes

Risk reward relates to the evaluation of the risk and reward profile of an investment opportunity to come to the decision of whether we should invest. Investing is not an exercise to invest in stocks with the highest return potential because that may come with disproportionally high risks and lead to permanent capital loss. Rather, astute investors look for opportunities that offer the most attractive risk-adjusted return. We’ll start by learning the different measurements of reward and the different types of risks. Then we’ll learn how to think about investments with the most attractive risk reward dynamics.

Key Takeaways:

  • Different measurements of return
  • Different types of risks
  • Balancing risk and return


1. What is Risk Reward


Risk Reward is the thought framework that considers the potential of returns as well as risk in the analysis of investment opportunities.

2. Total Return


Total Return is the total return, expressed in percentage format, earned on an investment over the holding period.

3. Internal Rate of Return (IRR)


Internal Rate of Return (IRR) is effectively the annualized rate of return over the investment horizon.

4. IRR Relationship to Discount Rate


IRR is mathematically calculated the same as the Discount Rate.

5. Multiple on Invested Capital (MOIC)


MOIC is a measure of return that puts in perspective how much money you get back relative to how much money you put in.

6. Pre-Tax Equity Gains


Pre-Tax Equity Gains is the monetary measurement of return that tells you exactly how much money you made on an investment, before tax.

7. How to Present Returns Profile


In this lesson, we'll learn how to present the returns metrics like an investment professional.

8. Business Risk


Business Risk represent the uncertainties surrounding a company's commercial performance.

9. Financial Risk


Financial Risk represents the uncertainties imposed on a company due to its amount of debt.

10. Systematic Risk


Systematic Risk, also known as Market Risk, represents the uncertainties that can affect the entire market.

11. Mitigating Business and Financial Risk Through Diversification


Just like we shouldn't put all our eggs in one basket, we shouldn't put all our capital in a single stock.

12. Risk Drives Discount Rate


Recall that the Discount Rate represents the annualized rate of return that we'd require in order to invest in a company given its risk.

13. Risk-Adjusted Return


Earning high returns isn't good enough. We want to earn high risk-adjusted return.

14. The Importance of Margin of Safety


Margin of Safety is super important in investing. It's the cushion that protects our capital against risks that materialize.

15. Price as the Biggest Driver of Risk


Price is the biggest driver of risk because the higher the price you pay for a stock, the smaller the margin it has for error.

16. Asymmetric Risk Reward Dynamics


Asymmetric risk reward dynamics characterize situations where the potential for gains and the potential for loss are uneven.

17. Assessing Case Study Risk Reward Profile


In this lesson, we'll bring together everything we've learned about risk reward and apply the knowledge to our PayPal case study.

18. Connecting Dots


Risk Reward is the final piece of the puzzle to our Foundation curriculum.