What is ‘Safety-First Rule’
Within the context of post-modern and modern portfolio theory, a safety-first rule involves creating a portfolio based on a minimum level of portfolio returns, which is called the minimum acceptable return. By setting up a minimum acceptable return, investors will mitigate the risk of not achieving their investment objective.
Explaining ‘Safety-First Rule’
A safety-first rule is a form of margin of safety that can be used when creating a portfolio using post-modern portfolio theory. When maximizing the objective function, the expected return used in the security market line equation in lowered, to reflect this margin of safety. The objective function in this capacity is the Sharpe ratio or the Sortino ratio.
Further Reading
- Safety-first, stochastic dominance, and optimal portfolio choice – www.cambridge.org [PDF]
- Portfolio choice and equilibrium in capital markets with safety-first investors – www.sciencedirect.com [PDF]
- Safety first—an expected utility principle – www.cambridge.org [PDF]
- The safety first expected utility model: Experimental evidence and economic implications – www.sciencedirect.com [PDF]
- Safety first portfolio selection, extreme value theory and long run asset risks – link.springer.com [PDF]
- Generalized safety first and a new twist on portfolio performance – www.tandfonline.com [PDF]
- Smoothed safety first and the holding of assets – www.tandfonline.com [PDF]
- Safety-first analysis and stable paretian approach to portfolio choice theory – www.sciencedirect.com [PDF]
- Evaluating Environmental Risks Using Safety‐First Constraints – onlinelibrary.wiley.com [PDF]
- Generalized safety first and the planting of crops – www.tandfonline.com [PDF]
