Safety-First Rule


DEFINITION of 'Safety-First Rule'

Within the context of post-modern and modern portfolio theory, a safety-first rule involves creating a portfolio based on a minimum level of portfolio returns, which is called the minimum acceptable return. By setting up a minimum acceptable return, investors will mitigate the risk of not achieving their investment objective.

BREAKING DOWN 'Safety-First Rule'

A safety-first rule is a form of margin of safety that can be used when creating a portfolio using post-modern portfolio theory. When maximizing the objective function, the expected return used in the security market line equation in lowered, to reflect this margin of safety. The objective function in this capacity is the Sharpe ratio or the Sortino ratio.

  1. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, ...
  2. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  3. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  4. Capital Market Line - CML

    A line used in the capital asset pricing model to illustrate ...
  5. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  6. Financial Modeling

    The process by which a firm constructs a financial representation ...
Related Articles
  1. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe Ratio

    Learn how to follow the efficient frontier to increase your chances of successful investing.
  2. Fundamental Analysis

    The Capital Asset Pricing Model: An Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  3. Active Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  4. Options & Futures

    Financial Concepts

    Diversification? Optimal portfolio theory? Read this tutorial and these and other financial concepts will be made clear.
  5. Mutual Funds & ETFs

    4 Mutual Funds Warren Buffet Would Buy

    Learn about four mutual funds Warren Buffett would invest and recommend to his trustee, and discover detailed analysis of these mutual funds.
  6. Stock Analysis

    Markets Are Tanking: Time to Buy Like Buffett

    Learn about three value stocks Warren Buffett holds in his portfolio. See how Buffett uses market declines to find good deals on stocks.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  9. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  10. Fundamental Analysis

    Emerging Markets: Analyzing Colombia's GDP

    With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy.
  1. 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 >>
  2. What is the average return on equity for a company in the retail sector?

    The retail sector includes automotive; building supply; distributors; general; grocery and food; online; and special lines ... Read Full Answer >>
  3. What is the average price-to-book ratio of companies in the retail sector?

    The retail sector includes seven types of retail companies: automotive; building supply; distributors; general; grocery and ... Read Full Answer >>
  4. Are companies with high Book Value Of Equity Per Share (BVPS) takeover targets?

    Companies with high book value of equity per share (BVPS) can be good takeover targets if those companies are public and ... Read Full Answer >>
  5. Why is the utilities sector popular among value investors?

    The utilities sector is popular among value investors due to the dividends paid by utility companies as well as the traditionally ... Read Full Answer >>
  6. What factors make the telecommunications sector good for value investing?

    The telecommunications sector is an attractive option for value investors because it is an integral part of the global economy. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!