Optimum safety/return principle and applications (Q1578321)

This paper studies the problem of finding for a single-period investment an optimal relation between rate of return and safety, where the latter is essentially the negative of the risk measured by the variance or standard deviation of the returns. Given a utility function over expected return and safety, the first order condition of optimality induces the desired relation, called the optimum return/safety principle. Examples are given in the areas of portfolio optimization, life-time insurance, and financial leverage.