The safety-first optimal portfolio is determined by maximizing the safety-first ratio (SFRatio), which is calculated as:

$\text{SFRatio} = \frac{E(R_p) - R_L}{\sigma_p}$

where:

• $E(R_p)$ is the expected portfolio return,
• $R_L$ is the investor's minimum acceptable return (5% in this case, derived from the $5,000 withdrawal requirement),
• $\sigma_p$ is the standard deviation of portfolio returns.

Calculations:

• Portfolio 1: $\frac{23\% - 5\%}{15\%} = 1.20$
• Portfolio 2: $\frac{12\% - 5\%}{6\%} = 1.17$
• Portfolio 3: $\frac{15\% - 5\%}{8\%} = 1.25$

Portfolio 3 has the highest SFRatio (1.25), making it the safety-first optimal choice. This minimizes the probability of the portfolio's return falling below the minimum acceptable return (shortfall risk).