Page 61 - FINAL CFA I SLIDES JUNE 2019 DAY 3
P. 61
LOS 10.m: Define shortfall risk, calculate the Session Unit 3:
safety-first ratio, and select an optimal portfolio 10. Common Probability Distributions
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!
