Roy's Safety-First Criterion - SFRatio

AAA

DEFINITION of 'Roy's Safety-First Criterion - SFRatio'

An approach to investment decisions that sets a minimum required return for a given level of risk. The Roy's safety-first 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".

INVESTOPEDIA EXPLAINS 'Roy's Safety-First Criterion - SFRatio'

The safety-first 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.

RELATED TERMS
  1. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. Modified Sharpe Ratio

    A ratio used to calculate the risk-adjusted performance of an ...
  3. Risk-Free Rate Of Return

    The theoretical rate of return of an investment with zero risk. ...
  4. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  5. Jensen's Measure

    A risk-adjusted performance measure that represents the average ...
  6. Risk Management

    The process of identification, analysis and either acceptance ...
Related Articles
  1. Investing Basics

    What's the difference between capital ...

  2. Fundamental Analysis

    What's the difference between capital ...

  3. Investing Basics

    Why is it important to understand the ...

  4. Mutual Funds & ETFs

    What does a mutual fund's beta coefficient ...

Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  5. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  6. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
Trading Center