Safety-First Rule

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  3. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected ...
  4. Capital Market Line - CML

    A line used in the capital asset pricing model to illustrate ...
  5. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return ...
Related Articles
  1. Bonds & Fixed Income

    Find The Highest Returns With The Sharpe ...

  2. Fundamental Analysis

    The Capital Asset Pricing Model: An ...

  3. Active Trading

    Modern Portfolio Theory: Why It's Still ...

  4. Options & Futures

    Financial Concepts

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center