Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure

Investment decisions usually involve the assessment of more than one financial asset or investment project (real asset). The most appropriate way to analyze the viability of a real asset is not to study it in isolation but as part of a portfolio with correlations between the input variables of the p...

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Autores principales:	Javier G. Castro, Edison A. Tito, Luiz E. Brandão
Formato:	article
Lenguaje:	EN
Publicado:	MDPI AG 2021
Materias:	risk-return real options Monte Carlo simulation portfolio optimization Omega measure Risk in industry. Risk management HD61 Finance HG1-9999
Acceso en línea:	https://doaj.org/article/dcd5d35444a54f84bac6806e07926781
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spelling	oai:doaj.org-article:dcd5d35444a54f84bac6806e079267812021-11-25T18:08:35ZOptimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure10.3390/jrfm141105301911-80741911-8066https://doaj.org/article/dcd5d35444a54f84bac6806e079267812021-11-01T00:00:00Zhttps://www.mdpi.com/1911-8074/14/11/530https://doaj.org/toc/1911-8066https://doaj.org/toc/1911-8074Investment decisions usually involve the assessment of more than one financial asset or investment project (real asset). The most appropriate way to analyze the viability of a real asset is not to study it in isolation but as part of a portfolio with correlations between the input variables of the projects. This study proposes an optimization methodology for a portfolio of investment projects with real options based on maximizing the Omega performance measure. The classic portfolio optimization methodology uses the Sharpe ratio as the objective function, which is a function of the mean-variance of the returns of the portfolio distribution. The advantage of using Omega as an objective function is that it takes into account all moments of the portfolio’s distribution of returns or net present values (NPVs), not restricting the analysis to its mean and variance. We present an example to illustrate the proposed methodology, using the Monte Carlo simulation as the main tool due to its high flexibility in modeling uncertainties. The results show that the best risk-return ratio is obtained by optimizing the Omega measure.Javier G. CastroEdison A. TitoLuiz E. BrandãoMDPI AGarticlerisk-returnreal optionsMonte Carlo simulationportfolio optimizationOmega measureRisk in industry. Risk managementHD61FinanceHG1-9999ENJournal of Risk and Financial Management, Vol 14, Iss 530, p 530 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	risk-return real options Monte Carlo simulation portfolio optimization Omega measure Risk in industry. Risk management HD61 Finance HG1-9999
spellingShingle	risk-return real options Monte Carlo simulation portfolio optimization Omega measure Risk in industry. Risk management HD61 Finance HG1-9999 Javier G. Castro Edison A. Tito Luiz E. Brandão Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure
description	Investment decisions usually involve the assessment of more than one financial asset or investment project (real asset). The most appropriate way to analyze the viability of a real asset is not to study it in isolation but as part of a portfolio with correlations between the input variables of the projects. This study proposes an optimization methodology for a portfolio of investment projects with real options based on maximizing the Omega performance measure. The classic portfolio optimization methodology uses the Sharpe ratio as the objective function, which is a function of the mean-variance of the returns of the portfolio distribution. The advantage of using Omega as an objective function is that it takes into account all moments of the portfolio’s distribution of returns or net present values (NPVs), not restricting the analysis to its mean and variance. We present an example to illustrate the proposed methodology, using the Monte Carlo simulation as the main tool due to its high flexibility in modeling uncertainties. The results show that the best risk-return ratio is obtained by optimizing the Omega measure.
format	article
author	Javier G. Castro Edison A. Tito Luiz E. Brandão
author_facet	Javier G. Castro Edison A. Tito Luiz E. Brandão
author_sort	Javier G. Castro
title	Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure
title_short	Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure
title_full	Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure
title_fullStr	Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure
title_full_unstemmed	Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure
title_sort	optimization of a portfolio of investment projects: a real options approach using the omega measure
publisher	MDPI AG
publishDate	2021
url	https://doaj.org/article/dcd5d35444a54f84bac6806e07926781
work_keys_str_mv	AT javiergcastro optimizationofaportfolioofinvestmentprojectsarealoptionsapproachusingtheomegameasure AT edisonatito optimizationofaportfolioofinvestmentprojectsarealoptionsapproachusingtheomegameasure AT luizebrandao optimizationofaportfolioofinvestmentprojectsarealoptionsapproachusingtheomegameasure
_version_	1718411588311973888

Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure

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