Risk and reward. They are two sides of the same coin \u0096 at least that\u0092s the way it\u0092s supposed to work for stock investors.<p>If you assume the risk of investing in a stock, you should expect a reward that is appropriate to the risk.</p><p>The problem with the risk and reward relationship is that the reward is always a \u0093potential\u0094 reward. If it were certain, there would be no risk.</p><p>Still, investors need a way to figure out way that reward should be. Fortunately, there is a quick way you can get a reading on an investment&#39;s potential reward to see if it is in line with the risk you are taking.</p><h3>First Step</h3>The first step is to determine the \u0093risk-free\u0094 return available in the market. This is an investment you could own that is without risk and serves as a baseline for your measurement.<p>Many investors use U.S Treasury Bonds for this benchmark, since they are backed by the \u0093full faith and credit\u0094 of the U.S. Government.</p><p>If you can earn a risk-free return from Treasury bonds of two percent, that becomes your baseline. Any investment with risk must return more than five percent.</p><p>The amount the investment returns over two percent is known as the risk premium.</p><p>For example, if you are looking at a stock that with an expected return of 11 percent, the risk premium is nine percent (11% - 2% &#61; 9% risk premium).</p><h3>Enough</h3>Is that enough of a premium for the risk that this particular stock may not achieve the return you expect?<p>For a well-established, large-cap stock, it probably is. However, for a young, small-cap stock, that may not be enough of a risk premium to justify the risk you are taking with the investment.</p><h3>Conclusion</h3>This simple test is certainly not all the analysis you should do and there could be other factors involved. However, you should always ask yourself if the risk premium for a particular investment makes it worth risking your money on a particular stock (or any investment).