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In the competitive electricity market environment, generation companies (Gencos) are more flexible to make their production decisions with an objective of gaining more profits. To achieve such an objective with relatively low risk, Gencos can participate in different markets where different returns may be obtained with different degrees of risks. In this paper, we assume that Gencos have options, i.e. selling energy in an energy market, in an operating reserve market or in both. The optimal generation capacity allocation problem is modeled as a risky investment portfolio problem and the well-developed portfolio theory is applied to maximize the Genco' profit with risk associated well taken into account. An optimization model is developed and a solving approach presented. Finally, numerical examples are served for demonstrating the developed model and approach.