When to use Sharpe Ratio vs Roy’s Safety First measure to determine optimal portfolio?
Somebody will have to back me up on this, but I believe you would use Roy’s Safety 1st when the investor has a shortfall risk concern. So, if you go to page 72 in Reading 13, Roy’s Safety 1st shows up in Blue Box 1. The investor has a liquidity need of 60,000 in the next twelve months. Because of this, you use RSF to help you decide which allocation gives you highest probability of meeting that need.
Just work through that example (BB1), read the text right above Blue Box 1, and see footnote 7. I think these are the only places where RSF shows up in Level III.
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