Template-Type: ReDIF-Paper 1.0
Author-Name: van Bekkum, S.
Author-Name-Last: van Bekkum
Author-Name-First: Sjoerd
Author-Name: Pennings, H.P.G.
Author-Name-Last: Pennings
Author-Name-First: Enrico
Author-Person: ppe274
Author-Name: Smit, J.T.J.
Author-Name-Last: Smit
Author-Name-First: Han
Title: A Real Options Perspective On R&D Portfolio Diversification
Abstract: 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.
Creation-Date: 2009-04-03
File-URL: https://repub.eur.nl/pub/15410/ERS-2009-019-STR.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2009-019-STR
Classification-JEL: D21, L20, M, O31, O32
Keywords: portfolio analysis, real options, research & development
Handle: RePEc:ems:eureri:15410