What is a good risk/reward ratio for options?
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| Our approach achieves a reduction in the variance of return, boosts performance in environments with intrinsic variability in the reward structure, and compares favourably both with primitive actions and with risk-neutral options. | |
41 Citations | For cases where it is difficult to discriminate between the options, plots of risk versus reward are shown to be useful for identifying the best alternative based on the risk preference of the companyapos;s management. |
Open access•Posted Content 17 Citations | The main theme throughout our analysis is that minimising risk, as opposed to maximising reward, leads to good out-of-sample performance. |
4 Citations | Specifically, they showed that risky options with high-value outcomes are inferred to have lower probability than options offering a less valuable reward. |
12 Citations | The authors show this using equity index options and find that most of the empirical equity risk premium reflects compensation for downside risk—in fact, upside participation earned little reward in the long run, reflecting an extreme asymmetry that might be surprising to some investors. |
| In this light, we present an approach for managing IT investment risk that helps to rationally choose which options to deliberately embed in an investment so as to optimally control the balance between risk and reward. | |
Open access•Posted Content 660 Citations | We document that a definition of risk aversion and risk seeking as the preference for options perceived to be more risky or less risky, respectively, provides the cross-situational stability to a person's risk preference that has eluded more traditional definitions. |
14 Citations | Here we propose that to make a comparison between different options it is important to know not only the average reward, but also both the risk and level of certainty (or control) associated with an option. |
| Finance academics and professionals, however, prefer to value risky prospects in terms of a trade-off between expected reward and risk, where the latter is usually measured in terms of reward variance. | |
| These results suggest that people's evaluations of risky options are based not only on the options' payoffs and probabilities but also on the extent to which they fit the risk–reward structure of the environment. |
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