An investor consults an investment manager to advise him regarding a certain type of the portfolios which would give him at least a 7% return on his investment (threshold return). The investment manager presents three portfolios exhibited in the following table: Portfolio A Portfolio B Portfolio C Expected Return 19% 23% 36% Standard Deviation 14% 26% 39% Using the Safety-First ratio assumption, the portfolio that is the most suitable for the investor is: A. Portfolio A. B. Portfolio B. C. Portfolio C.

CFA Level 1 Question Of The Week - Quantitative Methods (3) - CFA Level 1

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This topic has 1 reply, 1 voice, and was last updated Oct-197:13 pm by Matt_AnalystPrep.

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Matt_AnalystPrep

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19 Oct 2019 at 7:13 pm

The correct answer is A.

As provided in the following table, the Safety-First ratio of Portfolio A is the highest so it has the lowest probability of the portfolio returns falling below the investor’s threshold level of 7%.

	Portfolio A	Portfolio B	Portfolio C
Expected Return	19%	23%	36%
Standard Deviation	14%	26%	39%
Safety First ratio	(0.19-0.07)/0.14 = 0.8571;	(0.23-0.07)/0.26 = 0.6153;	(0.36-0.07)/0.39 = 0.7435

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