About Lesson
LOS M requires us to:
define shortfall risk, calculate the safety-first ratio, and select an optimal portfolio using Roy’s safety-first criterion
a. It is a risk that the expected return on a project may fall below a target threshold return over any given period. That is,
b. To overcome this risk, we make use of Roy’s Safety First Criterion. According to this criterion, an optimal portfolio minimizes the portfolio risk (e. P(Rp < RT)).
This method makes use of a safety ratio, to minimize the portfolio risk. This ratio can be calculated by taking the difference between the expected return on the portfolio and the target threshold return and dividing the result by the portfolio standard deviation.
The portfolio with a larger safety ratio is considered a better portfolio.