Cut off point is a point separating two opposite states, such as ‘yes’ and ‘no.’Basically it is the point at which an investor decides whether or not a particular security is worth purchasing. The cutoff point is very subjective and will be based on the personal characteristics of the individual investor.he cutoff point is subject and varies from investor to investor. However, in general, cutoff points vary by risk. That is, the cutoff point is almost higher for a riskier investment, meaning that the investor will not invest in a risky venture that is unlikely to have a high rate of return. Some investors adopt cutoff points as their personal investment policies, while others decide based on the situation Some examples of personal characteristics that may determine the cutoff point include the investor’s required rate of return and his or her risk aversion level.
Because cutoff points are largely subjective, they will vary widely among investors. For example, if an investor has a lower required rate of return, he or she will likely pay more for the same security than a person with a higher required rate of return. This translates into a higher cutoff point for the first investor.
A cutoff point may also be considered a good “rule of thumb” when considering particular securities, as it may help the investor make more consistent investment decisions.