Risk-return plots | Vose Software

Risk-return plots

Risk-return (or cost-benefit) plots are one way to graphically compare several decision options on the same plot. The expected return in some appropriate measure is plotted on the vertical axis versus the expected cost in some measure on the horizontal axis.

The plot should be tailored to the decision-question, and it may be useful to plot two or more such plots to show different aspects.

Examples of measures of return (benefit):

  • Probability of making a profit

  • Income or expected return

  • Number of animals that could be imported for a given level of risk (if one was looking at various border control options for disease control, say)

  • The number of extra votes that would be gained in an election campaign

  • The time that would be saved

  • The reduction in the number of complaints received by a utility company

  • The extra life expectancy of a kidney transplant patient

Examples of measures of risk (cost):

  • Amount of capital invested

  • Probability of exceeding schedule deadline

  • Probability of financial loss

  • Conditional mean loss (see here)

  • Standard deviation or variance of profit or cashflow

  • Probability of introduction of a disease

  • Semi-standard deviation of loss (see here)

  • Number of employees that would be made redundant

  • Increased number of fatalities

  • The level of chemical emission into the environment

See Also