http://dx.doi.org/10.1016/j.respol.2009.03.009
scopus: cited 6 times
web of science: cited 2 times
A Real Options Perspective On R&D Portfolio Diversification
September 2009
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This paper shows that the conditionality of investment decisions in R&D has a critical impact on portfolio risk, and implies that traditional diversification strategies should be reevaluated when a portfolio is constructed. Real option theory argues that research projects have conditional or option-like risk and return properties, and are different from unconditional projects. Although the risk of a portfolio always depends on the correlation between projects, a portfolio of conditional R&D projects with real option characteristics has a fundamentally different risk than a portfolio of unconditional projects. When conditional R&D projects are negatively correlated, diversification only slightly reduces portfolio risk. When projects are positively correlated, however, diversification proves more effective than conventional tools predict.
- project
- portfolio
- option
- value
- diversification
- variance
- correlation
- investment
- portfolio risk
- research
- result
- r &d projects
- effect
- policy
- portfolio variance
- simulation
- model
- analysis
- number
- example
