The impact made on project portfolio optimisation by the selection of various risk measures

Abstract

This study addresses the effect of selecting an appropriate risk measure and the impact of this choice on the efficient frontier of the project portfolio of an organisation. The appropriate choice of a firm’s project portfolio has a great impact on the organisational success. Each portfolio manager selects the best projects with different criteria and consistent with firm’s strategic objectives. We used the Markowitz efficient frontier method to select the best projects of the organisation. The choice of proper measures impacts on this decision and can change the organisation’s portfolio. The standard deviation was applied, and the relevant optimisation was made for this purpose. Then, the semi-standard deviation was used to differentiate between favourable and unfavourable opportunities. Afterwards, Value at Risk and Expected Shortfall were applied as appropriate risk measures to make a better estimate of the tail risks. All these risk measures were used to select the best possible projects. Managers should select the appropriate risk measures according to their objectives, estimation of their project distribution, and characteristics of the projects. This research studied the best measures consistent with construction projects and the effect of changes in these measures.