Page 63 - FINAL CFA I SLIDES JUNE 2019 DAY 3
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LOS 10.m: Define shortfall risk, calculate the Session Unit 3:
safety-first ratio, and select an optimal portfolio
using Roy’s safety-first criterion, p231. 10. Common Probability Distributions
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 desirable using
Roy’s safety-first criterion and the p the portfolio value will fall = 3%-9%/12% = F(–0.5)
short of the target amount.
