Does anyone know the formula for the safety first ratio?
Rp-RL/ Std Dev
Thanks for the formula. Given the formula how would I go about to solve this problem: A college endowment fund has $150 million. The fund manager intends to withdraw $2million from the fund for operations, and she has minimum year end acceptable level of 151 million. The fund has two choices for the portfolio. The endowment manager can choose Portfolio A, which has an expected return of 10% and a std. deviation of 14%, or Port. B which has an expected returnn of 12% and a std. deviation of 20%. Given this scenario, which of the following statements regarding Roy’s saftety first criterion is TRUE? A) the threshold is equal to 0.3 B) Port. B should be chosen because it has a SFRatio of 0.5 C) Port. A should be chosen b/c it has a SFRatio of 0.57 D) Port. A and B are both acceptable b/c the SFRatio’s fall in the acceptable range
the only thing you have to figure out here in the question is what level of return you need at minimum for this fund. it starts with 150 mil, it needs to get to 151 mil at the end of year but also withdraw 2 mil (so really needs to get to 153 mil). This means the fund needs to make 2%… 150 x 1.02 = 153 mil. Knowing the 2% safety #, just plug and chug: 10 - 2/14 = .57 for portfolio A 12 - 2/20 = .5 for portfolio B choose the one w/ the higher ratio, so that’s portfolio A Answer C
C Believe the Threshold is 3/148 = .02 SFR for Port A = .10 - .02 / .14 = .569 SFR for Port B = .12 - .02 / .20 = .498 Choose Port A b/c it has a higher SFR ***Edit: Pretty much same answer as post above***
same formula as the sharpe ratio i think
almost- sharpe subtracts the risk free rate, but safety 1st subtracts whatever ‘safety’ or threshold rate you’re looking to use. you guys will almost certainly see at least one question on the test on one of these 2 ratios- probably a pretty easy one where you see a little chart of portfolios and you choose the best one and just plug in a few #'s. easy points- get this one right on the test and just reinforce this formula in your head now. peyton manning throwing INT’s… priceless.
Sharpe ratio measures the excess returns per unit of risk. It is more related to returns on the portfolio and the market’s return. Safety first ratio measures the excess returns per unit of risk, comparing the returns on the porfolio to the threshold returns indicated in the invesment policy statement.
Yes I know, I Should of been more specific, I ment in terms of memorizing the formula, You know one you know the other, just change risk free to min return. robb