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Safety-First Rule

What is '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.

Explaining '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.


Further Reading


Safety-first, stochastic dominance, and optimal portfolio choice
www.cambridge.org [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

Portfolio choice and equilibrium in capital markets with safety-first investorsPortfolio choice and equilibrium in capital markets with safety-first investors
www.sciencedirect.com [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

Safety first—an expected utility principleSafety first—an expected utility principle
www.cambridge.org [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

The safety first expected utility model: Experimental evidence and economic implicationsThe safety first expected utility model: Experimental evidence and economic implications
www.sciencedirect.com [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

Safety first portfolio selection, extreme value theory and long run asset risksSafety first portfolio selection, extreme value theory and long run asset risks
link.springer.com [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

Generalized safety first and a new twist on portfolio performanceGeneralized safety first and a new twist on portfolio performance
www.tandfonline.com [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

Smoothed safety first and the holding of assetsSmoothed safety first and the holding of assets
www.tandfonline.com [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

Safety-first analysis and stable paretian approach to portfolio choice theorySafety-first analysis and stable paretian approach to portfolio choice theory
www.sciencedirect.com [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

Evaluating Environmental Risks Using Safety‐First ConstraintsEvaluating Environmental Risks Using Safety‐First Constraints
onlinelibrary.wiley.com [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

Generalized safety first and the planting of cropsGeneralized safety first and the planting of crops
www.tandfonline.com [PDF]
… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …



Q&A About Safety-First Rule


What does this problem look like mathematically?

Where Pr(R < R) = P(Portfolio Return < Minimum Desired Return).

What type of constraint must be satisfied in order for an optimal solution to exist for Roy's safety-first criterion?

There must be no negative values in any cells in column R or row R.

What is a safety-first rule?

A safety-first rule involves creating a portfolio based on a minimum level of portfolio returns.

How does Roy's safety-first criterion work?

For example, suppose there are two available investment strategies, Portfolio A and Portfolio B, and suppose the investor's threshold return level (the minimum return that the investor is willing to tolerate) is -1%. Then, the investor would choose the portfolio that would provide maximum probability of Portfolio Return being at least as high as -1%.

What type of mathematical equation describes Roy's safety-first criterion?

It is a minimization problem with constraints.

What is the Safety-First Rule?

The Safety-First Rule is a technique that allows an investor to select one portfolio rather than another based on the criterion that the probability of the portfolio's return falling below a minimum desired threshold is minimized.

What does this problem look like symbolically?

This problem can be summarized symbolically as follows.

Which types of portfolios will satisfy these constraints when using Roy's safety-first criterion?

Only those portfolios whose returns are greater than or equal to zero will satisfy these constraints.

How does the safety-first rule involve maximizing an objective function?

The objective function in this capacity is the Sharpe ratio or the Sortino ratio.

What are some examples of post-modern and modern portfolio theory?

Post-modern and modern portfolio theory include mean variance optimization, Markowitz efficient portfolios, and Black–Litterman model.

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