Jul 24th, 2007 Archives

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Today I’d like to share my thoughts about risk vs. reward ratio.

Risk vs. reward ratio is the first thing you should think about if you are unsure about joining a new program. For example, talking about program which can offer 40% for 3 days of investment you only risk your money for 3 days and have the potential to earn 20% pure profit. On the other hand, if a program pays 2% for 60 days (the same 20% profit) it will take you 50 days only to break-even so you will risk your money for a period 17 times longer than being an investor of the first program. So the demand for the first program will be very high comparing to the second one other factors being equal.

What will make the second program more attractive to new investors? It will require much more effort from admin’s side to create trust among investors because every day hundreds of new HYIPs appear with ROI higher then 2% x 60 days. Why should you put money into this program when you will be in profit only after 51 day? Even if you think the admin is honest and capable of running a good program it doesn’t mean that the program will survive two months online. As a rule, the risks are much greater than in the first case when we deal with 40% x 3 days.

Risk in high yield industry is often mapped to the probability of closing the program which is seen as undesirable. Usually the probability of closing and some assessment of its expected harm (the loss of deposit) must be combined into a believable scenario (an outcome) which combines the set of risk, regret and reward probabilities into an expected value for that outcome. So you always should expect the worst but hope for the best. But it’s not just a lottery in which either you win or you lose. You have to estimate possible risk, compare it to the reward you may get and loss you may sustain and make your own conclusions whether this investment opportunity is worth your participation or not. I will show how to do it with real examples in my next posts on this matter.

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