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CFA Level 1 Question of the Week - Quantitative Methods

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 APortfolio BPortfolio C
Expected Return19%23%36%
Standard Deviation14%26%39%


Using the Safety-First ratio assumption, the portfolio that is the most suitable for the investor is:
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CFA Level 1 Question of the Week - Quantitative Methods 6 votes

A. Portfolio A.
83% 5 votes
B. Portfolio B.
0% 0 votes
C. Portfolio C.
16% 1 vote

Comments

  • Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 106 Associate
    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 APortfolio BPortfolio C
    Expected Return19%23%36%
    Standard Deviation14% 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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