The Safety First Portfolio

Investors in a safety-first portfolio theory aim to minimize the probability of ruin. An investor is ruined when his terminal wealth falls short of a subsistence level upon retirement. The safety-first model,with normally distributed returns, an investor chooses a portfolio to minimize the possibility of suffering financial ruin.

Suppose returns are not normally distributed, but instead have very large negative results and very large positive results, but these extremes are rare. The safety first investor gives up a substantial portion of the extreme positive returns in exchange for limiting the extreme negative ones.