Simple explanation for hot list risk reward rating

**blast_investor** Thu Dec 30, 2004 5:06 pm

Simple explanation for hot list risk reward rating
A simple explanation for hot list risk reward rating is like below:

If a gold bar is worth $1000 in US gold market, its certificate is only selling for $100 in stock market with intrinsic value of $1000.

When the gold bar certificate stock price jumped up big from $100 to $200 in 2 months, will you consider this certificate unsafe to buy?

In my opinion of course not. It is not as good as original entry price. But
$200 with $1000 intrinsic value is still a bargain to buy for the long run.

When the certificate jumped up further to $700 or more, then it may not be an attractive stock to hold because of volatility of gold price.

You can see my above example, when a stock jump 200% or 300% or more, it can still be a safe stock to buy or hold for the long run. The intrinsic value of stock is also in the calculation of risk reward ratio here as well.

**blast_investor** Sun Apr 24, 2005 1:12 am

Another way around,

when the gold bar is worth $1000, but its certificate is trading at $10k bubble price in New York Stock Exchange with instrinsic value of only $1000.

When the gold certificate lost value of 80% in half year, and the bubble bursted. Now the certificate is trading at $2,000 with $1000 intrinsic value, is this a buy because it dropped 80% value ?

No, it is still expensive and risky trading at 2 times of its intrinsic value. Even if the price appears cheap from peak price and it dropped big time, it may still be very risky and very expensive.