Roy's Safety-First Criterion (SFRatio)
Definition of 'Roy's Safety-First Criterion (SFRatio)'
The SFRatio is calculated by dividing the expected return on the risky portfolio by the standard deviation of the risky portfolio. The higher the SFRatio, the more risk-averse the investor is.
To use the SFRatio, investors first need to estimate the expected return and standard deviation of their risky portfolio. They can then use the SFRatio to determine the optimal allocation between risky assets and risk-free assets.
The SFRatio is a useful tool for investors who want to manage their risk. However, it is important to note that the model does not take into account all of the factors that investors should consider when making investment decisions.
Here are some of the limitations of the SFRatio:
* The model does not take into account the investor's time horizon.
* The model does not take into account the investor's risk tolerance.
* The model does not take into account the investor's other financial goals.
Despite these limitations, the SFRatio can be a useful tool for investors who are looking for a simple way to manage their risk.
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