Estimation of Downside Risks in Project Portfolio Selection

dc.contributorAalto-yliopistofi
dc.contributorAalto Universityen
dc.contributor.authorKettunen, Janne
dc.contributor.authorSalo, Ahti
dc.contributor.departmentGeorge Washington University
dc.contributor.departmentDepartment of Mathematics and Systems Analysis
dc.date.accessioned2018-02-09T10:02:25Z
dc.date.available2018-02-09T10:02:25Z
dc.date.issued2017-10-01
dc.description.abstractIn project portfolio selection, the aim is to choose projects which are expected to offer most value and satisfy relevant risk and other constraints. In this study, we show that uncertainties about how much value the projects will offer, combined with the fact that only a subset of the proposed projects will be selected, lead to inaccurate risk estimates about the aggregate value provided by the selected project portfolio. In particular, when downside risks are measured in terms of lower percentiles of the distribution of portfolio value, these risk estimates will exhibit a systematic bias. For deriving unbiased risk estimates, we present a calibration framework in which the required calibration can be presented in closed-form in some cases or, more generally, derived by using Monte Carlo simulation to study a large number of project selection decisions. We also show that when the decision must comply with risk constraints, the introduction of tighter (more demanding) risk constraints can counterintuitively aggravate the underestimation of risks. Finally, we present how the calibrated risk estimates can be employed to align the portfolio with the decision maker's risk preferences while eliminating systematic biases in risk estimates.en
dc.description.versionPeer revieweden
dc.format.extent15
dc.format.extent1839-1853
dc.format.mimetypeapplication/pdf
dc.identifier.citationKettunen , J & Salo , A 2017 , ' Estimation of Downside Risks in Project Portfolio Selection ' , Production and Operations Management , vol. 26 , no. 10 , pp. 1839-1853 . https://doi.org/10.1111/poms.12727en
dc.identifier.doi10.1111/poms.12727
dc.identifier.issn1059-1478
dc.identifier.otherPURE UUID: 95530124-0ecd-4c28-a75f-7f45479bc27b
dc.identifier.otherPURE ITEMURL: https://research.aalto.fi/en/publications/95530124-0ecd-4c28-a75f-7f45479bc27b
dc.identifier.otherPURE LINK: http://www.scopus.com/inward/record.url?scp=85021315633&partnerID=8YFLogxK
dc.identifier.otherPURE FILEURL: https://research.aalto.fi/files/17205261/Kettunen_et_al_2017_Production_and_Operations_Management.pdf
dc.identifier.urihttps://aaltodoc.aalto.fi/handle/123456789/29914
dc.identifier.urnURN:NBN:fi:aalto-201802091411
dc.language.isoenen
dc.relation.ispartofseriesProduction and Operations Managementen
dc.relation.ispartofseriesVolume 26, issue 10en
dc.rightsopenAccessen
dc.subject.keywordoptimization
dc.subject.keywordproject portfolio selection
dc.subject.keywordresearch and development
dc.subject.keywordsimulation
dc.titleEstimation of Downside Risks in Project Portfolio Selectionen
dc.typeA1 Alkuperäisartikkeli tieteellisessä aikakauslehdessäfi
dc.type.versionpublishedVersion
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