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Question:

A college endowment fund has $150 million. The fund manager intends to withdraw $2 million from the fund for operations, and she has a minimum year-end acceptable level of $151 million. The fund has two choices for the portfolio. The endowment manager can choose Portfolio X. which has an expected return of 10% and a standard deviation of 14%, or Portfolio Y, which has an expected return of 12% and a standard deviation of 20%. Given this scenario, which of the following statements regarding Roy’s safety-first criterion is most accurate?

A The fund should choose Portfolio X.
Explaination

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Choose Portfolio X because it has the larger safety-first ratio, (0.10 - 0.02)/0.14 = 0.57.