Is the risk-reward ratio considered in Quantitative Finance?
Is the risk-reward ratio considered in Quantitative Finance?
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Tom Tucker · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: Tom Tucker
Original post: https://quant.stackexchange.com/questions/9369
License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Many discretionary traders swear by risk-reward ratio, as in "The minimum risk-reward ratio for a Forex trade is 1:2."
Do quantative traders use risk-to-reward ratio as well? If so, how do you calculate the minimum risk-reward ratio?
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Shane · External communityPost link
External answer — Quantitative Finance Stack Exchange
Author: Shane
Original post: https://quant.stackexchange.com/a/9384
License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
Maximizing expected return while minimizing risk is at the heart of the quantitative revolution in finance in
modern portfolio theory
.
Starting with Harry Markowitz (1952)
"Portfolio Selection"
, a huge portion of quantitative finance is dedicated to refining the ideas around mean-variance portfolio optimization. The objective is to find a weight vector $w$ that will minimize:
$$w^T \Sigma w$$
subject to:
$$R^T w = \mu$$
When evaluating performance,
the Sharpe ratio
is the most widely used performance measure, and it directly (if a little crude) addresses the trade-off between risk and reward.
$$S = \frac{E[R-R_f]}{\sqrt{\mathrm{var}[R]}}$$
I recommend reading Peter Bernstein's
"Capital Ideas"
as a gentle introduction to this subject.
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Quoted from Forex.com.bd-Editorial External answer — Quantitative Finance Stack Exchange Author: Shane Source score (net votes, not local likes): 3 Original post: https://quant.stackexchange.com/a/9384 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Maximizing expected return while minimizing risk is at the heart of the quantitative revolution in finance in modern portfolio theory . Starting with Harry Markowitz (1952) "Portfolio Selection" , a huge portion of quantitative finance is dedicated to refining the ideas around mean-variance portfolio optimization. The objective is to find a weight vector $w$ that will minimize: $$w^T \Sigma w$$ subject to: $$R^T w = \mu$$ When evaluating performance, the Sharpe ratio is the most widely used performance measure, and it directly (if a little crude) addresses the trade-off between risk and reward. $$S = \frac{E[R-R_f]}{\sqrt{\mathrm{var}[R]}}$$ I recommend reading Peter Bernstein's "Capital Ideas" as a gentle introduction to this subject.
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