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Selection of optimal portfolios of interdependent real options

This paper presents a new method for selection of optimal options portfolios. The problem of defining optimal portfolios of real options is formulated as integer programming. The algorithm of generating an optimal portfolio of real options is also presented. | Selection of optimal portfolios of interdependent real options Decision Science Letters 9 2020 215 232 Contents lists available at GrowingScience Decision Science Letters homepage www.GrowingScience.com dsl Selection of optimal portfolios of interdependent real options Bogdan Rebiasza aAGH University of Science and Technology Poland CHRONICLE ABSTRACT Article history This paper presents a new method for selection of optimal options portfolios. The problem of Received June 9 2019 defining optimal portfolios of real options is formulated as integer programming. The algorithm Received in revised format of generating an optimal portfolio of real options is also presented. The incremental benefit of September 25 2019 portfolio of real options is valued using Monte Carlo simulation and modeling the prices and Accepted October 27 2019 Available online demand as Geometric Brownian Motion. The presented method allows to select optimal October 27 2019 portfolios of real options with consideration of statistical and qualitative dependences of options. Keywords The results show that real options can generate a significant increase in the net present value Real options NPV . Portfolio selection Stochastic processes Investment decision Monte Carlo simulation 2020 by the authors licensee Growing Science Canada. 1. Introduction In the 1950s portfolio theory was discovered and developed by Markowitz 1952 . The financial portfolio analysis is based on the concept of diversification. Diversification is decisive for the creation of an efficient portfolio. Thanks to it we get the opportunity to reduce the variability of returns around the expected return Markowitz 1952 . Markowitz diversification is understood as a combination of assets that are less than perfectly correlated. Thanks to diversification we get a risk reduction while maintaining the level of portfolio returns Francis 1991 . Markowiz 1952 definied the efficient portfolio as any asset or combination of assets that has .