DEFINITION of 'Roy's SafetyFirst Criterion  SFRatio'
An approach to investment decisions that sets a minimum required return for a given level of risk. The Roy's safetyfirst criterion allows portfolios to be compared based on the probability that their returns will fall below this minimum desired threshold. It is calculated by subtracting the minimum desired return from the expected return of the portfolio and dividing the result by the standard deviation of portfolio returns. The optimal portfolio will be the one that minimizes the probability that the portfolio's return will fall below a threshold level.
Also known as the "SFRatio".
BREAKING DOWN 'Roy's SafetyFirst Criterion  SFRatio'
The safetyfirst ratio is calculated as:
= E(r)  Threshold Return
Standard Deviation
The optimal decision is to choose the portfolio with the highest SFRatio. The SFRatio is very similar to the Sharpe ratio; for normally distributed returns, when the minimum return is equal to the risk free rate this will provide the same conclusions as if we were to pick the return with the maximum Sharpe ratio. The SFRatio is commonly found in financial courses and certificates, such as the CFA Level I material.

Sharpe Ratio
A ratio developed by Nobel laureate William F. Sharpe to measure ... 
Modified Sharpe Ratio
A ratio used to calculate the riskadjusted performance of an ... 
Risk Management
The process of identification, analysis and either acceptance ... 
RiskAdjusted Return
A concept that refines an investment's return by measuring how ... 
RiskFree Rate Of Return
The theoretical rate of return of an investment with zero risk. ... 
Jensen's Measure
A riskadjusted performance measure that represents the average ...

Fundamental Analysis
What Causes Inflation in the United States
Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out. 
Term
What are NonGAAP Earnings?
NonGAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles. 
Mutual Funds & ETFs
ETF Analysis: PowerShares FTSE RAFI US 1000
Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks. 
Options & Futures
Use Options to Hedge Against Iron Ore Downslide
Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders. 
Stock Analysis
Fortinet: A Great Play on Cybersecurity
Discover how a healthy product mix, largebusiness deal growth and the boom of the cybersecurity industry are all driving Fortinet profits. 
Stock Analysis
2 Catalysts Driving Intrexon to AllTime Highs
Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects. 
Charts & Patterns
Understand How Square Works before the IPO
Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business. 
Technical Indicators
4 Ways to Find a Penny Stock Worth Millions
Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams. 
Professionals
Chinese Slowdown Affects Iron Ore Market
The Chinese economy's ongoing slowdown is having a major impact on iron ore demand. 
Investing Basics
Why do Debt to Equity Ratios Vary From Industry to Industry?
Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.

What is the formula for calculating compound annual growth rate (CAGR) in Excel?
The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >> 
When does the fixed charge coverage ratio suggest that a company should stop borrowing ...
Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >> 
What is the difference between the return on total assets and an interest rate?
Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >> 
What is the utility function and how is it calculated?
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >> 
How can EV/EBITDA be used in conjunction with the P/E ratio?
Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >> 
How can a company reduce the unsystematic risk of its own security issues?
Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... Read Full Answer >>