CFA Level I · CFA Level I Exam · Statistical Distributions for Financial Asset Prices and Returns
A portfolio has an expected annual return of 9% and a standard deviation of 12%. The investor's minimum acceptable return is 3%. The portfolio's safety-first ratio is closest to:
The safety-first ratio is 0.50. It equals the expected return of 9% less the 3% threshold, giving 6%, divided by the 12% standard deviation. Using the full 9% return instead of the excess over the threshold would give 0.75, which is wrong.
- A0.25
- B0.50Correct
- C0.75
Explanation
SFRatio = (9% - 3%) / 12% = 6/12 = 0.50. The 0.75 value comes from dividing the expected return by the standard deviation (9/12) without subtracting the threshold. The 0.25 value comes from dividing the threshold by the standard deviation (3/12).
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