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. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return ...
  4. Modern Portfolio Theory - MPT

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

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

    A model that describes the relationship between risk and expected ...
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