Skip to content

CFA Level I · CFA Level I Exam · Statistical Distributions for Financial Asset Prices and Returns

An investor who applies Roy's safety-first criterion to choose among portfolios would most likely select the portfolio that:

The investor would choose the portfolio with the highest safety-first ratio, meaning the expected return minus the threshold return, divided by standard deviation. Under normality, maximizing this ratio minimizes the probability of a return below the threshold, so neither the lowest risk nor the highest return alone is the criterion.

  1. Ahas the lowest standard deviation of returns
  2. Bhas the highest expected return
  3. Chas the highest ratio of excess return over the threshold to standard deviationCorrect

Explanation

Roy's safety-first ratio is (E(Rp) - RL) / σp. Maximizing it minimizes the probability that the return falls below the threshold level, assuming normally distributed returns. Choosing the lowest standard deviation or the highest expected return ignores one of the two inputs.

Did you get it right without looking?

One question tells you little. A timed set on Statistical Distributions for Financial Asset Prices and Returns shows your real accuracy, how long you take and where you lose marks.

Practise Statistical Distributions for Financial Asset Prices and ReturnsFree diagnostic mock

More Statistical Distributions for Financial Asset Prices and Returns questions