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What is Roy's safety-first criterion?

Roy's safety-first criterion

It's a technique to manage the difference in risk between one investment option and another. It's a criterion based on minimizing the lowest return expected from a certain portfolio compared with another one.

Where have you heard about Roy's safety-first criterion?

As an investor this criterion is a well known tool in risk management. It is also known as the SFRatio. If you have to decide which set of investments has the highest probability of not falling below your minimum threshold, you use the SFRatio.

What you need to know about Roy's safety-first criterion.

When using this criterion you should choose the investment option with the highest SFRatio. If the returns from an investment follow a normally distributed curve, you can use the standard deviation to take away from the mean returns to produce a probable percentage return.

It is similar to the Sharpe ratio and the Surtino ratio. As with all tools to assess investment risk there is a possibility of a loss as well as a profit.

Find out more about Roy's safety-first criterion.

To find out more about Roy's safety-first criterion, see our definitions of risk management and Sharpe's ratio.

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