Investopedia

Roy's Safety-First Criterion - SFRatio

Dictionary Says

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 Says

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.

Articles Of Interest

  1. If You Don't Mind Volatility, Deere Could Still Do Alright

    Though Deere's shares sold off after earnings, the business model is sound and rolling along.
  2. Agilent Isn't Making It Easy On Investors

    Core operating performance at Agilent needs to improve
  3. Consumer Spending As A Market Indicator

    What people buy and where they shop can provide valuable information about the economy.
  4. Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  5. Overheated Expectations Send Rackspace Investors To The Torture Chamber

    Absent a real competitive moat, it's hard to make sense of Rackspace's valuation.
  6. Mondelez Isn't As Good As Nestle, But Priced Like It Is

    Investors seem to bullish on Mondelez, given the relative performance at Kellogg and Nestle.
  7. Johnson Controls Has A Lot Of Improving Left To Do

    Analysts are projecting a big turnaround in Johnson Controls' margins, but that the downside risks are meaningful
  8. Build A Baby Berkshire

    Get a piece of Warren Buffett's profit by using Form 13F to coattail his picks.
  9. Given Procter & Gamble's Performance, Should The Weak Volumes Matter More?

    P&G looks like an increasingly expensive margin improvement play in consumer staples.
  10. Nokia Still Straddling Fault Lines

    Nokia Still Straddling Fault Lines by Stephen D. Simpson, CFA Roughly 18 months into his tenure as the CEO of Nokia (NYSE:NOK), Stephen Elop hasn't yet proven much of anything about ...
comments powered by Disqus
Marketplace
Hot Definitions
  1. Affluenza

    A social condition arising from the desire to be more wealthy, successful or to "keep up with the Joneses." Affluenza is symptomatic of a culture that holds up financial success as one of the highest achievements.
  2. Icarus Factor

    The term Icarus factor describes a situation where managers or executives initiate an overly ambitious project which then fails. Fueled by excitement for the project, the executives are unable to reign in their misguided enthusiasm before it is too late to avoid the failure.
  3. Angelina Jolie Stock Index

    An index made up of a selection of stocks from companies associated with actress Angela Jolie.
  4. Consequential Loss

    The amount of loss incurred as a result of being unable to use business property or equipment.
  5. Lease To Own

    An arrangement where an individual enters into a lease agreement with an owner with the inclusion of a clause that typically gives the individual the right, but not the obligation, to purchase the item leased at a predefined price and time.
  6. Failed Break

    A price movement through an identified level of support or resistance that does not have enough momentum to maintain its direction.
Trading Center