Real-world examples of risk-reward ratio examples for investments

Quick context before the examples

Risk-reward ratio is simply the potential loss on an investment compared to the potential gain. If you risk \(100 to potentially make \)300, your risk-reward ratio is 1:3. Lower is better: you want to risk as little as possible for as much upside as you can realistically capture.

Now let’s get into the real examples of risk-reward ratio examples for investments, starting with everyday situations most investors actually encounter.

Stock trading: short-term examples of risk-reward ratio examples for investments

Short-term stock traders live and die by risk-reward. They set a stop-loss (how much they’re willing to lose) and a profit target (how much they’re aiming to gain) before entering a trade.

Imagine a U.S. tech stock trading at $50 in early 2025. You’ve done your homework and see:

• Strong support around $47 (recent low where buyers stepped in)
• Reasonable upside to $58 based on recent highs

You decide:

• Entry: $50
• Stop-loss: \(47 (you’ll exit if the stock falls \)3)
• Target: \(58 (you’ll take profits at \)8 gain)

Your risk is \(3 per share. Your potential reward is \)8 per share.

• Risk-reward ratio = 3:8 → simplified to about 1:2.67

This is a textbook example of risk-reward ratio examples for investments in active trading: you’re risking \(1 to try to make roughly \)2.67. If your analysis is sound and you can find similar setups consistently, you don’t need to be right every time to come out ahead.

Now contrast that with a weaker setup:

• Entry: $50
• Stop-loss: \(48 (risk \)2)
• Target: \(52 (reward \)2)

Risk-reward ratio is 1:1. Here, you must be right far more often to make money. Many professional traders simply skip trades where the risk-reward ratio is worse than 1:2, because the math doesn’t work in their favor over time.

Long-term index investing: quieter but powerful examples include retirement portfolios

Most retirement investors aren’t setting daily stop-losses, but they are making long-term risk-reward decisions. One of the best examples of risk-reward ratio examples for investments at the portfolio level is a basic stock–bond mix.

Consider two investors in 2024, both using low-cost index funds:

• Investor A: 100% in a U.S. total stock market index fund
• Investor B: 60% in the same stock index, 40% in a high-quality U.S. bond index fund

Historically, U.S. stocks have returned around 10% annually before inflation over long periods, while high-quality bonds have returned less but with lower volatility. For historical return and volatility context, see data from sources like the Federal Reserve and academic research summarized by the Federal Reserve Bank of St. Louis.

Over a 20–30 year horizon:

• Investor A is accepting deeper drawdowns (think 40–50% in a severe bear market) for higher expected returns.
• Investor B is sacrificing some upside for a smoother ride and smaller drawdowns (maybe 25–35% in a severe bear market, depending on bond behavior).

If we simplify this into a risk-reward ratio example:

• Assume Investor A targets an 8% real (after inflation) return with a potential 50% peak-to-trough drawdown.
• Assume Investor B targets a 5.5% real return with a potential 30% drawdown.

Roughly speaking:

• Investor A: risk 50 to gain 8 → 1:0.16 (very high risk, high reward)
• Investor B: risk 30 to gain 5.5 → 1:0.18 (less risk, moderate reward)

It’s not a perfect, trade-style risk-reward ratio, but it’s a clear example of risk-reward ratio examples for investments at the portfolio level: you’re trading off maximum drawdown (risk) against long-term expected return (reward).

Dividend stocks vs. growth stocks: a practical example of trade-offs

Another example of risk-reward ratio examples for investments shows up when you choose between a mature dividend payer and a high-growth stock.

Take two hypothetical companies in 2025:

• Company D: Utility stock, 4.5% dividend yield, slow earnings growth
• Company G: High-growth tech stock, no dividend, fast revenue growth

You expect:

• Company D to return about 7% per year (4.5% yield + ~2.5% price appreciation)
• Company G to return about 12% per year, but with much higher volatility

Looking at history, high-dividend utilities tend to be less volatile than high-growth tech. During market stress, utilities might fall 20–30%, while speculative tech can drop 50–70%. The COVID-19 crash and 2022 tech selloff are recent reminders; you can see sector performance data via the U.S. Securities and Exchange Commission’s investor education materials.

If you mentally tag “maximum expected drawdown” as your risk and “expected annual return” as your reward, you might see:

• Company D: risk 25 for 7 → 1:0.28
• Company G: risk 55 for 12 → 1:0.22

The growth stock offers a higher absolute return, but a worse risk-reward ratio by that framing. Whether you choose D or G depends on your tolerance for big swings, but this is a clear example of risk-reward ratio examples for investments that investors face every time they compare “boring” and “exciting” stocks.

Bond ladder vs. single long-term bond: interest rate risk in action

Bonds are often treated as the “safe” part of a portfolio, but 2022 taught investors that long-duration bonds can be very painful when interest rates rise. That makes bonds a timely source of real examples of risk-reward ratio examples for investments.

Consider two choices in early 2025:

• A single 20-year U.S. Treasury bond yielding 4.3%
• A bond ladder of Treasuries maturing in 1, 3, 5, 7, and 10 years with an average yield of 4.0%

The 20-year bond offers slightly higher yield (reward) but much higher interest rate risk. If rates spike 2 percentage points higher, the long bond could drop 20–30% in price, while the ladder might lose far less because shorter bonds mature sooner and can be reinvested at higher rates.

If we simplify risk as “potential price loss from a rate shock” and reward as “extra yield vs. the ladder,” then:

• Extra yield from the 20-year bond: maybe 0.3% per year
• Extra downside risk vs. the ladder: perhaps an additional 10–15% in a big rate move

You’re risking 10–15 units of downside to gain only 0.3 units of yield. That’s a poor risk-reward ratio example in many scenarios, and it’s exactly why many advisors favor ladders or intermediate-term bond funds rather than going all-in on long duration.

For more on how interest rate risk works, the U.S. Securities and Exchange Commission has a solid overview of bond risk types.

Options trading: textbook examples of asymmetric risk-reward

Options are where the most dramatic examples of risk-reward ratio examples for investments show up. The payoff structures are literally built to be asymmetric.

Buying a call option

Suppose a stock is trading at $100. You buy a call option with:

• Strike price: $105
• Expiration: 3 months
• Premium: $4 per share

Your maximum loss is the premium: $4 per share.
Your potential reward is theoretically unlimited if the stock soars.

If you set a realistic profit target, say selling the option when it reaches $12, then:

• Risk = $4
• Target reward = $8
• Risk-reward ratio = 1:2

This is one of the cleanest examples of risk-reward ratio examples for investments: clearly defined limited downside, multiple of upside, and a specific exit plan.

Selling a naked call option

Flip the trade. You sell that same call option for $4 without owning the stock. Now:

• Your maximum reward is $4 (the premium you collected)
• Your potential loss is unlimited if the stock skyrockets

From a risk-reward perspective, that’s the opposite: tiny reward, enormous potential risk. Many investors underestimate this until a short squeeze or takeover offer blows up the trade.

Options can be used intelligently, but they are a sharp tool. The risk-reward ratio examples for investments here are extreme, which is why regulators and educational organizations spend so much time warning about options risk. The Financial Industry Regulatory Authority (FINRA) provides guidance on options risks and strategies at finra.org.

Crypto investing: speculative real examples from 2020–2024

Crypto is the wild west of risk-reward. Between 2020 and 2021, many coins delivered 5x–20x returns. Between 2022 and 2023, many of those same coins fell 70–95%. That’s not theory; that’s lived experience for millions of investors.

Take a hypothetical crypto allocation in 2024:

• An investor puts 5% of their portfolio into a diversified crypto basket (Bitcoin, Ethereum, and a few large-cap altcoins)
• The other 95% is in a balanced stock–bond portfolio

The investor might view this as a barbell approach:

• The 95% core portfolio has moderate risk and moderate reward
• The 5% crypto slice has extremely high risk but potentially very high reward

If crypto goes to zero, the total portfolio might drop only about 5%. If crypto 5x-es, that 5% could grow to 25% of the portfolio, raising overall returns.

So the implicit risk-reward ratio example:

• Risk: 5% of total portfolio
• Potential reward: meaningful boost to long-term returns if the asset class matures

This is one of the best examples of risk-reward ratio examples for investments where investors cap the downside with position size instead of tight stop-losses. They accept that the asset is volatile but limit how much of their net worth is exposed.

Private real estate deal vs. public REIT: illiquidity as part of the ratio

Real estate provides another set of real examples of risk-reward ratio examples for investments, especially when you compare private deals to public REITs (Real Estate Investment Trusts).

Imagine in 2025 you’re choosing between:

• A private real estate syndication promising 14–16% annualized returns over 7–10 years, with limited liquidity
• A public REIT ETF yielding 4% with an expected total return around 8–10% annually, tradable daily

The private deal’s pitch is clear: more reward, but with higher risk and less liquidity. Risks include:

• You may not be able to sell when you want
• Project-level risk (construction delays, tenant defaults, local downturns)
• Sponsor risk (management quality)

If you frame the risk-reward ratio example this way:

• Private deal: extra 5–6 percentage points of expected return vs. REITs, but with the possibility of partial or total capital loss
• Public REIT: lower expected return, but diversified, regulated, and liquid

Many investors decide the extra expected return isn’t worth tying up money for a decade in a single project. Others, with higher risk tolerance and strong due diligence, accept the trade-off. Again, the decision is basically an argument over which risk-reward ratio examples for investments make sense at different stages of life and wealth.

How to use these examples in your own investing

Seeing examples of risk-reward ratio examples for investments is useful, but the point is to change how you make decisions:

• Before you buy anything, ask: “What am I realistically risking here, and what’s the realistic upside?”
• If the ratio looks like 1:1 or worse, question why you’re taking the trade.
• If the ratio looks attractive but the probability of success is tiny, be honest about that too.
• Adjust position size so that even a worst-case scenario doesn’t wreck your portfolio.

You don’t need to calculate risk-reward down to three decimal places. But you do want to avoid situations where you’re quietly risking 30–50% of your net worth to chase an extra 1–2% of return.

For broader investor education on risk and expected return, the U.S. Department of Labor and SEC’s Investor.gov both offer plain-language guides on diversification, volatility, and long-term planning.

FAQ: examples of risk-reward ratio examples for investments

What is a simple example of a good risk-reward ratio in stocks?

A common example of a favorable risk-reward ratio in stocks is risking \(5 per share to potentially make \)15 per share. For instance, buying at \(50, placing a stop-loss at \)45, and targeting a sell at $65 gives you a 1:3 risk-reward ratio. You only need to be right on a fraction of those trades for the math to work in your favor.

Are higher risk-reward ratios always better?

Not automatically. A 1:5 ratio sounds great, but if the probability of success is extremely low, you might still lose money over time. The best examples of risk-reward ratio examples for investments balance attractive ratios with realistic probabilities. A consistent 1:2 or 1:3 setup that works often enough can beat a flashy 1:10 setup that almost never pays off.

How do long-term investors use risk-reward ratios?

Long-term investors think in terms of portfolio-level risk-reward, not just single trades. They compare the expected return and volatility of portfolios (like 80/20 vs. 60/40 stock–bond mixes) and use those examples of risk-reward ratio examples for investments to choose an allocation that matches their time horizon and tolerance for drawdowns.

Can you give an example of risk-reward in bonds?

A straightforward example of risk-reward in bonds is choosing between a short-term Treasury fund and a long-term Treasury fund. The long-term fund might pay a bit more yield, but it can lose much more value if interest rates rise. Many investors decide that an extra 0.5% in yield isn’t worth the possibility of 15–20% price swings, so they favor shorter or intermediate maturities.

How can beginners practice using risk-reward ratios?

Beginners can start by paper trading or using a small amount of capital. For each trade or investment, write down:

• Entry price
• Stop-loss or maximum acceptable loss
• Profit target or expected upside

Then calculate the ratio of potential loss to potential gain. Over time, you’ll build your own set of real examples of risk-reward ratio examples for investments that match your personality and discipline.