Roy’s safety-first criterion requires the maximization of the SF Ratio:
SF Ratio = (expected return – threshold return) / standard deviation
|
Portfolio |
Expected Return (%) |
Standard Deviation (%) |
SF Ratio |
|
1 |
13 |
5 |
1.40 |
|
2 |
11 |
3 |
1.67 |
|
3 |
9 |
2 |
1.50 |
Portfolio #2 has the highest safety-first ratio at 1.67.
