| Title | A Real Options Perspective on R&D Portfolio Diversification |
|---|---|
| Published in | Discussion paper / Tinbergen Institute. ISSN 0929-0834. |
| Author | Bekkum, van S. (Sjoerd); Pennings, H.P.G. (Enrico); Smit, J.T.J. (Han) |
| Date | 2008-01-07 |
| Language | English |
| Type | working paper |
| Publisher | Tinbergen Institute |
| 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. |
| Publication | http://hdl.handle.net/1765/10897 |
| Persistent Identifier | urn:NBN:nl:ui:15-1765/10897 |
| Metadata | XML |
| Repository | Erasmus University Rotterdam |
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