- CFA Exams
- CFA Exam: Level I 2021
- Study Session 3. Quantitative Methods (2)
- Reading 9. Common Probability Distributions
- Subject 9. Shortfall Risk and Roy's Safety-First Criterion

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**CFA Practice Question**

Which of the following statements is (are) incorrect?

II. Safety-first rules are concerned with shortfall risk.

III. An investment can be evaluated by focusing on safety-first rules.

IV. An investment can be evaluated by focusing on the whole distribution of returns.

I. According to Roy's safety-first criterion, an optimal portfolio minimizes the probability that the returns on all the stocks in the portfolio fall below the threshold level.

II. Safety-first rules are concerned with shortfall risk.

III. An investment can be evaluated by focusing on safety-first rules.

IV. An investment can be evaluated by focusing on the whole distribution of returns.

Correct Answer: I only

Roy's safety-first criterion states that an optimal portfolio minimizes the probability that the portfolio return will fall below the threshold level.

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**User Contributed Comments**
13

User |
Comment |
---|---|

standaert |
doesn't returns on all the stocks in the portfolio equal portfolio return? |

Gina |
vs the overall portfolio return |

Gina |
the way it is phrased it means each and every one stock... |

danlan |
IV is correct also, but it's not related to Roy's safety-first criterion. Right? |

tssverma |
Basically, it seems only portfolio is considered irrespective of how it is structured w.r.t. stocks. |

kaliokale |
I am sure i will be tricked if i see this question on the exam |

mtcfa |
to danlan: yes IV is correct and not related to Roy's safety first. It's just another way of evaluating an investment. |

bobert |
standaert, not necessarily. You need to consider the weight of the stock in the portfolio. |

epizi |
portfolio return is not similar to return on all the stocks.Some stocks will have better return that others but the portfolio records the aggregate return of all, and that is the reference of SF. |

JKiro |
standaert: portfolio components may include stocks, bonds and other assets such as commodities, real estate and cash... so we are interested in the "portfolio" return rather than simply "stocks" return |

LionHero |
Agree with JKiro |

bundy |
Portfolio vs all stocks SF Ration minimizes PORTFOLIO falling below threshhold |

wenhu |
really should read the question very carefully |