CFA Practice Question

CFA Practice Question

Marianne Singleton needs to earn 6% on her client's portfolio over the next year. She is evaluating two asset classes, A and B, with expected returns of 7% and 8.5%; and variances of 186 and 296 respectively. Based on Roy's Safety First rule, which of the two asset classes should Marianne select?
A. Asset class A
B. Asset class B
C. Neither
Explanation: According to the safety-first rule, SF-ratioA = (7 - 6)/1861/2 = 0.073, SF-ratioB = (8.5 - 6)/2961/2 = 0.145. Since B has a higher SF-ratio, select asset class B.

User Contributed Comments 8

User Comment
mark98007 "needs to earn 6%..." with those standard deviations, she is high risk if "needs" is the case; ~40% of the time she won't make it!
steved333 SF and Sharpe are the same except that SF uses minimum rate whereas Sharpe uses market return.
sagania I wonder what score steved333 is gone have... he knows everything,,, really good his comments.
johnmullrooney I went with neiter too, Choosing A or B if you need 6% is way too risky... would probably get you fired!
Shcote 14,5% chances of getting the minimum return is real low... neither was my answer.
dybacis I know based on the numbers we can assume the variances are % same as returns but would be better if the question actually stated correct variances as 0.0186 and 0.0296, otherwise the answers would be 0.073% and 0.145% which is ridiculously low for a safety first ratio
schweitzdm What does steved333 mean by "SF uses minimum rate"?
FozzeyBear SF means safety first, and steved333 means that instead of subtracting the market rate, you subtract the "minimum" number you are trying to achieve - in this case 6.
You need to log in first to add your comment.