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Some Problems in Applying the Continuous Portfolio Selection Model to the Discrete Capital Budgeting Problem

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  • Baum, Sanford
  • Carlson, Robert C.
  • Jucker, James V.

Abstract

Capital budgeting can be described as the problem of allocating scarce capital among a number of investment opportunities in such a manner that the outcome most preferred by a decision maker will result. When a single, mathematically explicit criterion is assumed, mathematical programming techniques can be applied. However, a single criterion, such as maximizing the return on investment or minimizing the risk of losing a sizable fraction of the original investment, is not appropriate for a significant number of real-world decision makers for whom two or more criteria, e.g., a judicious combination of return on investment and risk, are important. It has been argued [1] that it is usually not possible to obtain an explicit utility function for the decision maker and, consequently, that it is usually not possible to apply conventional (optimizing) mathematical programming techniques to find the most preferred outcome.

Suggested Citation

  • Baum, Sanford & Carlson, Robert C. & Jucker, James V., 1978. "Some Problems in Applying the Continuous Portfolio Selection Model to the Discrete Capital Budgeting Problem," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(2), pages 333-344, June.
    • Handle: RePEc:cup:jfinqa:v:13:y:1978:i:02:p:333-344_00
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    Cited by:

    1. Tobin, Roger L., 1999. "A fast interactive solution method for large capital expenditure selection problems," European Journal of Operational Research, Elsevier, vol. 116(1), pages 1-15, July.
    2. Sam Cole, 2010. "The regional portfolio of disruptions, protection, and disasters," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 44(2), pages 251-272, April.

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