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Risk-adjusted approach to optimize investments in product development portfolios

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8 Author(s)

Companies invest in a portfolio of products with the financial objective of increasing revenue and net profit. They also have a limited product development budget and uncertainty around which products will be successful. In this paper, we offer a methodology to manage the allocation of a limited budget across a portfolio of products. Specifically, we provide a practical approach for quantifying the risk in relation to attaining financial objectives, and we offer an approach to reallocate the limited budget across the various products. This approach also provides long-term financial implications of investment decisions that are taken today. This practical end-to-end methodology can build on existing portfolio management practices prevalent in many companies. The approach uses all available measured and estimated data, expert opinions, and mathematical techniques for risk elicitation, Monte Carlo simulation for risk quantification, and mathematical programming with risk measures for optimal reallocation. We also introduce a web-based tool, called Portfolio Risk and Investment Management Engine, that implements this methodology along with an illustrative case study.

Note: The Institute of Electrical and Electronics Engineers, Incorporated is distributing this Article with permission of the International Business Machines Corporation (IBM) who is the exclusive owner. The recipient of this Article may not assign, sublicense, lease, rent or otherwise transfer, reproduce, prepare derivative works, publicly display or perform, or distribute the Article.  

Published in:

IBM Journal of Research and Development  (Volume:54 ,  Issue: 3 )