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. Balance Sheet: Analyzing Owners' Equity
    Fundamental Analysis

    Balance Sheet: Analyzing Owners' Equity

  2. How To Lie With Financial Statistics ...
    Fundamental Analysis

    How To Lie With Financial Statistics ...

  3. The German Economic Miracle
    Fundamental Analysis

    The German Economic Miracle

  4. Reading The Balance Sheet
    Investing Basics

    Reading The Balance Sheet

comments powered by Disqus
Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  3. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  4. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center