Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87083
Authors: 
van Bekkum, Sjoerd
Pennings, Enrico
Smit, Han
Year of Publication: 
2007
Series/Report no.: 
Tinbergen Institute Discussion Paper 08-003/2
Abstract: 
This paper shows that the presence of conditional staging in R&D (Research & Development) has a critical impact on portfolio risk, and changes diversification arguments when a portfolio is constructed. When R&D projects exhibit option-like characteristics, correlation between projects plays a more complicated role than traditional portfolio diversification would suggest. Real option theory argues that research projects with conditional phases have option-like risk and return properties, and are different from unconditional projects. We show that 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 fundamentally different risk than a portfolio of unconditional projects. When conditional R&D projects are negatively correlated, portfolio risk is hardly reduced by diversification. When projects are positively correlated, however, diversification is more effective than these tools predict.
Subjects: 
Real Options
Research & Development (R&D)
Risk Management
Monte Carlo Simulation
JEL: 
G31
G32
O30
O32
Document Type: 
Working Paper

Files in This Item:
File
Size
331.96 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.