Practical Portfolio Optimization

Vladimir Shnaydman, PhD, is president of ORBee Consulting. Dr. Shnaydman holds a bachelor’s degree and a master’s degree in electrical engineering and computer science, a master’s degree in applied mathematics and operations research, and doctoral degree in engineering. He has contributed to many industries such as biotechnology, computer networking, data storages, water resources planning and management, telecommunications, transportation, and others. Dr. Shnaydman has also published more than 50 papers. He is coauthor of three books.

“The two scenarios you just solved in five minutes (using portfolio optimization model) took six of us eight hours to do on a Saturday.”
— Board member, Boeing (Dickinson, 1999)

Abstract
Project portfolio selection is one of the most important and challenging tasks many companies are facing today. Significant efforts are made to estimate, evaluate, and select the best projects for financing. Selection process is a routine process of research and development (R&D) portfolio review that is subject to the organization’s strategy, availability of resources, financial benefits, value and risk associated with each project in the portfolio, and a variety of business rules defining the unique environment of a company.

This paper highlights most popular portfolio selection techniques such as sorting, efficient frontier, and optimization. A simple example illustrates the advantages of optimization modeling as the technique that most adequately describes the portfolio selection process.

Introduction
Project portfolio selection is one of the most important and challenging tasks that the majority of medium and large companies are facing. Significant efforts are made to estimate, evaluate, and select the best projects for financing. Selection process is a routine process of R&D portfolio review that is subject to the organization’s strategy, …

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