CFA Practice Question

CFA Practice Question

An investor has $500,000 to invest at the beginning of the year. The expected return on the portfolio is 11%, the standard deviation 10%, and the riskless rate 5%. At the end of the year, the investor needs $20,000 for buying a car. Inflation will be 3% during the year. The investor wishes that the real value of the portfolio does not fall during the year. For the real value not be lower than it was at the beginning of the year, the Roy's Safety First Criterion is:
A. 0.40
B. 0.30
C. 0.20
Explanation: The investor requires $500,000 * 1.03 + $20,000 = $535,000, that is a 7% return. Roy's Safety First Criterion = (11% - 7%)/10% = 0.40

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