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Question:
An investor is considering investing in one of the three following portfolios:
If the investor’s minimum acceptable return is 5%, the optimal portfolio using Roy’s safety-first criterion is:
A
Portfolio Z.
explanation
Portfolio X: SFRatio = (12-5)/14=0.50
Portfolio Y: SFRatio = (17-5)/20=0.60
Portfolio Z: SFRatio = (22-5)/25= 0.68
According to the safety-first criterion, Portfolio Z, with the largest ratio (0.68), is the best alternative.
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