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. Jensen's Measure

    A risk-adjusted performance measure that represents the average ...
  4. Risk-Adjusted Return

    A concept that refines an investment's return by measuring how ...
  5. Risk Management

    The process of identification, analysis and either acceptance ...
  6. Risk-Free Rate Of Return

    The theoretical rate of return of an investment with zero risk. ...
Related Articles
  1. Investing

    What Happened To Obama’s Amnesty Bill?

    The sweeping Republican majorities were supposed to trigger change, but now they are preparing to embrace the Obama immigration policy.
  2. Fundamental Analysis

    What are the most common issues with Serial Correlation in stocks?

    Read about the concept of serial correlation in stock returns, and learn why market analysts are divided about the efficacy of trading based on stock patterns.
  3. Fundamental Analysis

    What is the difference between the acid test ratio and working capital ratio?

    Using liquidity ratios to determine the financial stability of a company is an important tool to accounting professionals and investors.
  4. Fundamental Analysis

    Do you always have to consider intrinsic value when purchasing a stock? Why or why not?

    Take a deeper look at why value investors consider a stock's intrinsic value an important consideration before picking a company to invest in.
  5. Fundamental Analysis

    What are some examples of return on investment capital?

    Read about some basic examples of return on investment capital for publicly traded companies and companies that have a handful of investors.
  6. Bonds & Fixed Income

    What is the difference between the yield of stock and the yield of a bond?

    Explore and understand the various meanings of the investment term "yield" as it is applied to equity investments and bond investments.
  7. Fundamental Analysis

    For which types of investments is the debt service coverage ratio (DSCR) the most useful?

    Understand what the debt service coverage ratio is used for and what types of companies it can best be applied to for equity valuation.
  8. Fundamental Analysis

    What is the difference between EBIT and operating income?

    Read about some of the subtle differences identified by the SEC between earnings before interest and taxes, or EBIT, and operating income.
  9. Fundamental Analysis

    How accurate or important is the debt service coverage ratio (DSCR) in evaluating whether to invest ...

    See how investors can use the debt service coverage ratio to evaluate the solvency of a company before making an investment decision.
  10. Bonds & Fixed Income

    How do I calculate yield to maturity of a zero coupon bond?

    Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than a bond with a coupon.

You May Also Like

Hot Definitions
  1. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  6. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
Trading Center