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.

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.

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… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

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… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

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… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

www.sciencedirect.com [PDF]

… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

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… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

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… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

www.tandfonline.com [PDF]

… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

www.sciencedirect.com [PDF]

… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

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… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

www.tandfonline.com [PDF]

… we use the language of the portfolio choice problem common in the financial economics literature … In this paper, we defined a class of generalized n -order Safety-First rules and have … returns, the union of optimal portfolio choices under the n -Order Safety-First rule provides a …

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Where Pr(R < R) = P(Portfolio Return < Minimum Desired Return).

There must be no negative values in any cells in column R or row R.

A safety-first rule involves creating a portfolio based on a minimum level of portfolio returns.

For example, suppose there are two available investment strategies, Portfolio A and Portfolio B, and suppose the investor's threshold return level (the minimum return that the investor is willing to tolerate) is -1%. Then, the investor would choose the portfolio that would provide maximum probability of Portfolio Return being at least as high as -1%.

It is a minimization problem with constraints.

The Safety-First Rule is a technique that allows an investor to select one portfolio rather than another based on the criterion that the probability of the portfolio's return falling below a minimum desired threshold is minimized.

This problem can be summarized symbolically as follows.

Only those portfolios whose returns are greater than or equal to zero will satisfy these constraints.

The objective function in this capacity is the Sharpe ratio or the Sortino ratio.

Post-modern and modern portfolio theory include mean variance optimization, Markowitz efficient portfolios, and Black–Litterman model.

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