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Simple Probabilistic Evaluation of Portfolio Strategies

Author

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  • William B. Poland

    (Strategic Decisions Group, 2440 Sand Hill Road, Menlo Park, California 94025)

Abstract

An important part of evaluating portfolio strategies is calculating probability distributions of key value measures, such as the net present value (NPV) of free cash flow. This task can be computationally daunting when the portfolio consists of many businesses or assets, so we have applied an approximate method that quickly captures the location, spread, and tilt (mean, variance, and skewness) of the portfolio distribution. We have also developed displays of the results that nontechnical senior managers can understand readily. These techniques allowed us to interactively explore portfolio strategies with the executive team of a packaging and plastics company comprising 20 businesses and to identify strategies with the potential to more than double NPV with reduced risk. We have since applied these techniques successfully in the pharmaceutical, oil and gas, telecommunications, chemical, and entertainment industries.

Suggested Citation

  • William B. Poland, 1999. "Simple Probabilistic Evaluation of Portfolio Strategies," Interfaces, INFORMS, vol. 29(6), pages 75-83, December.
    • Handle: RePEc:inm:orinte:v:29:y:1999:i:6:p:75-83
    DOI: 10.1287/inte.29.6.75
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    Citations

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    Cited by:

    1. Donald L. Keefer & Craig W. Kirkwood & James L. Corner, 2004. "Perspective on Decision Analysis Applications, 1990–2001," Decision Analysis, INFORMS, vol. 1(1), pages 4-22, March.
    2. Liesiö, Juuso & Salo, Ahti, 2012. "Scenario-based portfolio selection of investment projects with incomplete probability and utility information," European Journal of Operational Research, Elsevier, vol. 217(1), pages 162-172.
    3. Jeffrey S. Stonebraker, 2013. "Product-Generation Transition Decision Making for Bayer's Hemophilia Drugs: Global Capacity Expansion Under Uncertainty with Supply-Demand Imbalances," Operations Research, INFORMS, vol. 61(5), pages 1119-1133, October.
    4. Jeffrey S. Stonebraker, 2002. "How Bayer Makes Decisions to Develop New Drugs," Interfaces, INFORMS, vol. 32(6), pages 77-90, December.
    5. Craig W. Kirkwood & Matthew P. Slaven & Arnold Maltz, 2005. "Improving Supply-Chain-Reconfiguration Decisions at IBM," Interfaces, INFORMS, vol. 35(6), pages 460-473, December.
    6. Vilkkumaa, Eeva & Liesiö, Juuso & Salo, Ahti & Ilmola-Sheppard, Leena, 2018. "Scenario-based portfolio model for building robust and proactive strategies," European Journal of Operational Research, Elsevier, vol. 266(1), pages 205-220.

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