The doctoral dissertations of the former Helsinki University of Technology (TKK) and Aalto University Schools of Technology (CHEM, ELEC, ENG, SCI) published in electronic format are available in the electronic publications archive of Aalto University - Aaltodoc.

Portfolio Optimization Models for Project Valuation

Janne Gustafsson

Dissertation for the degree of Doctor of Science in Technology to be presented with due permission of the Department of Engineering Physics and Mathematics for public examination and debate in Auditorium E at Helsinki University of Technology (Espoo, Finland) on the 26th of August, 2005, at 12 o'clock noon.

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Dissertation is also available in print (ISBN 951-22-7790-5)


This dissertation presents (i) a framework for selecting and managing a portfolio of risky multi-period projects, called Contingent Portfolio Programming (CPP), and (ii) an inverse optimization procedure that uses this framework to compute the value of a single project. The dissertation specifically examines a setting where the investor can invest both in private projects and securities in financial markets, but where the replication of project cash flows with securities is not necessarily possible. This setting is called a mixed asset portfolio selection (MAPS) setting. The valuation procedure is based on the concepts of breakeven selling and buying prices, which are obtained by first solving an optimization problem and then an inverse optimization problem.

In the theoretical part of the dissertation, it is shown that breakeven prices are consistent valuation measures, exhibiting sequential consistency, consistency with contingent claims analysis (CCA), and sequential additivity. Due to consistency with CCA, the present approach can be regarded as a generalization of CCA to incomplete markets. It is also shown that, in some special cases, it is possible to derive simple calculation formulas for breakeven prices which do not require the use of inverse optimization. Further, it is proven that breakeven prices for a mean-variance investor converge towards the prices given by the Capital Asset Pricing Model (CAPM) as the investor's risk tolerance goes to infinity. The numerical experiments show that CPP is computationally feasible for relatively large portfolios both in terms of projects and states, and illustrate the basic phenomena that can be observed in a MAPS setting.

This thesis consists of an overview and of the following 5 publications:

  1. Gustafsson J., A. Salo (2005): Contingent Portfolio Programming for the Management of Risky Projects. Operations Research, to appear. © 2005 by authors and © 2005 Institute for Operations Research and the Management Sciences (INFORMS). By permission.
  2. Gustafsson J., B. De Reyck, Z. Degraeve, A. Salo (2005): Project Valuation in Mixed Asset Portfolio Selection. Helsinki University of Technology, Systems Analysis Laboratory, Research Report E16. © 2005 by authors.
  3. Gustafsson J., A. Salo (2005): Project Valuation under Ambiguity. Helsinki University of Technology, Systems Analysis Laboratory, Research Report E17. © 2005 by authors.
  4. Gustafsson J., A. Salo (2005): Valuing Risky Projects with Contingent Portfolio Programming. Helsinki University of Technology, Systems Analysis Laboratory, Research Report E18. © 2005 by authors.
  5. Gustafsson J., A. Salo, T. Gustafsson (2001): PRIME Decisions: An Interactive Tool for Value Tree Analysis. Murat Köksalan and Stanley Zionts (eds.), Proceedings of the Fifteenth International Conference on Multiple Criteria Decision Making (MCDM 2000). Ankara, Turkey, July 10-14, 2000. Lecture Notes in Economics and Mathematical Systems, 507 165-176.

Keywords: project valuation, project portfolio selection, mixed asset portfolio selection, multi-period projects, ambiguity

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© 2005 Helsinki University of Technology

Last update 2011-05-26