Page 96 - FINAL CFA SLIDES DECEMBER 2018 DAY 3
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Session Unit 3:
10. Common Probability Distributions
LOS 10.m: Define shortfall risk, calculate the safety-first ratio, and select
an optimal portfolio using Roy’s safety-first criterion, p 230
An investor is choosing between 2 Portfolios: A(ER=12%; SD=18%), and B(ER=10%; SD=12%). S/he wants
to minimize the p of losing money (-ve returns) (Assume returns are normally distributed).
Rule?
The portfolio with the larger SFR
using 0% as the threshold return
(RL) will be the one with the
lower p (-ve) returns.
The larger the SFR the better!
Also consistent with sharp ratio?
But SFR is a probability concept? So we need to estimate blue shade! But how?
Assumes normal distribution; so, Z-tables – 345/346!
