CFA CFA Level 1 CFA Level 1 Question of the Week – Quantitative Methods

# CFA Level 1 Question of the Week – Quantitative Methods

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• Matt_AnalystPrep
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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.
• Matt_AnalystPrep
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• CFA Charterholder
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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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