Discussion in 'Trading' started by ByLoSellHi, Apr 25, 2007.

In which example is an investor's risk/reward profile greater?

  1. Example A

    3 vote(s)
  2. Example B

    7 vote(s)
  3. They are equal

    7 vote(s)
  4. It is not possible to determine (if choosing this option, explain why)

    3 vote(s)
  1. Two examples follow.

    Assume that everything but stock price is equal. Assume that P/E ratio, EPS growth, PEG, etc. are all exactly the same for both companies.

    In which example is an investor's risk greater? Or in contrary terms, in which example is an investor's reward potential less?

    A) Company STY, which is currently trading at $12.57

    B) Company XYZ, which is currently trading at $93.17.
  2. You need to be clear that "greater risk/reward" means "greater risk" than reward. Risk is the numerator.

    Equal dollar? xxx shares each?
  3. risk/reward profile is the result of a POSITION. For example a long call or short stock each has a risk/reward profile.

    You have not presented us with two investment positions, just two stocks :)
  4. Coach -- we're to assume that each stock has similar betas, vols, etc... "all things being equal".
  5. Yes, everything is exactly equal.

    P/E, beta, PEG, P/S, even the balance sheets in terms of Current Ratios, % debt levels, and even the industry/sector.

    atticus, thank you for asking that.

    The question should be which example has a greater risk profile. But this is odd, because since everything is equal, whatever stock has the greater risk would automatically mean that the other has the greater reward potential.

    option coach - if you wish, substitute 'portfolio' rather than individual stocks.
  6. Still not a clear question. Stocks have unlimited reward profile and maximum risk limited to stock price.
  7. Didn't you just basically answer the question?

    I'm serious.
  8. I think he's asking if they're $-equivalent positions or share-equiv. One important variable.
  9. Oh, equal weighed in terms of dollar allocation.
  10. sellvol


    Did you hear this on "Are you smarter than a 5th grader"?
    #10     Apr 25, 2007