Risk


The portfolio optimization process described thus far incorporates anticipated project benefits (measured proportionally on a ratio scale), anticipated costs of the projects, as well as operational and political constraints. It can also incorporate risk, which you can include in the process in two ways. First, you can include risk minimization objectives in the objectives hierarchy by making pairwise comparisons as to the relative importance of these objectives compared to others, and the relative risks with respect to each risk objective. The total benefit of each project would then incorporate the risk minimization objectives.

A more formal and precise way to include risk considerations when determining an optimal portfolio of projects is to incorporate a subsidiary risk analysis that derives estimates of the relative probabilities of success (or failure) of the projects under consideration. The risk analysis, not discussed in detail here, can include every conceivable risk factor, both quantitative and qualitative, and derives relative risks or probability of success of the projects under consideration. You then determine the expected benefit of each project by multiplying its anticipated benefit by the probability of its success, as shown in Figure 23.15.

Figure 23.15. Multiplying Benefits by Probability of Success to Determine Expected Benefits


You then alter the portfolio optimization to determine a portfolio that maximizes the total expected benefit, as shown in Figure 23.16. The portfolio in this example does not differ from that derived earlier where there was no explicit consideration of risk, but in situations where one or more alternatives are relatively risky, the impact can be significant.

Figure 23.16. Optimal Portfolio Considering Project Risks





Design for Trustworthy Software. Tools, Techniques, and Methodology of Developing Robust Software
Design for Trustworthy Software: Tools, Techniques, and Methodology of Developing Robust Software
ISBN: 0131872508
EAN: 2147483647
Year: 2006
Pages: 394

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