Page 98 - FINAL CFA SLIDES DECEMBER 2018 DAY 3

LOS 10.m: Define shortfall risk, calculate the Session Unit 3:
safety-first ratio, and select an optimal portfolio using 10. Common Probability Distributions
Roy’s safety-first criterion, p231.

In summary, in RSFC:
Step 1: The threshold return is RL = (123.6

– 120) / 120 = 0.030 = 3%.

Example: For the next year, the managers of a $120
million college endowment plan have set a minimum

acceptable end-of-year portfolio value of $123.6
million. Three portfolios are being considered which

have the ER and SD below:

Conclusion: The best choice is Portfolio A

because it has the largest SFR.

The p of an ending value for Portfolio A < $123.6m

(3%)
Determine which of these portfolios is the most = 3%-9%/12% = F(–0.5)

desirable using Roy’s safety-first criterion and the p
the portfolio value will fall short of the target

amount. p/345/346!