Do we benchmark our capital gains return using RRR (Risk Reward Ratio)? Have anyone seriously put in a bit to think if ROC (Return on Capital) is the right methodology to calculate your profit or is it ROI (Return on Investment)???
ROC is plainly the ratio how much one makes from the total capital on hand.
ROI is simply the ratio how much you make from the total capital invested. Now what happen to the capital not invested laying in the bank???
RRR is basically the ratio of estimated loss (RISK) versus estimated gain (REWARD).
RRR in my opinion is probably a better way to evaluate your business risk. In a typical business one should not view the venture purely from the PROFITs or Capital Gains. One should work out the numbers on LOSSes first before counting the PROFITs.
If with $10,000 capital ... I divide my allocation into $1,000 for margin, $3,000 for paper loss and $6,000 for reserves with say $1,000 profit margin. Is this feasible business?
What is the actual capital required to make $1000 for the above? Is it $10,000 or is it $4,000? or Is it $3,000?
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