Portfolio Value

Portfolio value is maximized by appropriately prioritizing the projects within the portfolio based on the future potential financial value of each project multiplied by its probability of success. The future value of each development project is based on a calculation of its net present value (NPV). In this calculation, the anticipated financial return from the project is compared with that of an alternative investment of an equivalent amount of capital (8). The general equation for calculating NPV is 

The probability of success is the product of the probability of technical success, the probability of regulatory success, and the probability of commercial success. The criteria for these probabilities of success need to be clearly defined and characterized so that future PMTs can translate the impact of project progress and decisions on the value of the projects in the portfolio (see section on portfolio optimization using sensitivity analysis). 

TABLE 27.4 Discounted Cash Flows for a Hypothetical Drug Development Project  

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A portfolio manager has 100,000 to invest in a list of 20 stocks. She estimates the return from stock i over the next year as r(i), so that if x(i) dollars are invested in stock i at the start of the year, the end of year value is [1 + r(/)] jt(/). Write an MILP model that determines the amounts to invest in each stock in order to maximize end-of-year portfolio value under the following investment policy no more than 20,000 can be invested in any stock, and if a stock is purchased at all, at least 5000 worth must be purchased. 

Portfolio and Project Planning and Management Maximizing Portfolio Value... 

Special Features Workplace and environmental performance criteria. ICCR is the first major standard of corporate social responsibility movement to build a portfolio of holdings based on CSR criteria. The combined portfolio value now exceeds 110 billion. 

The third and final step is to calculate the percentage change in the bond s portfolio value when each key rate and neighboring spot rates are changed. There will be as many key rate durations as there are preselected key rates. Let s illustrate this process by calculating the key rate duration for a coupon bond. Our hypothetical 6% coupon bond has a maturity value of 100 and matures in five years. The bond delivers coupon payments semiannually. Valuation is accomplished by discounting each cash flow using the appropriate spot rate. The bond s current value is 107.32 and the process is illustrated in Exhibit 4.27. The initial hypothetical (and short) spot curve is contained in column (3). The present values of each of the bond s cash flows is presented in the last column. 

Most market participants are familiar with the concept of duration and its effect on the returns from fixed income instruments. However, the difference in the calculations of duration of a bond and a portfolio is worth noting. Most index and analytics providers (including Barclays Capital) calculate index and portfolio duration as the market value weighted duration of individual bonds that constitute the index or portfolio. The other measure, known as cash flow duration, calculates the duration based on the cash flow of the entire portfolio, using the internal rate of return (IRR) of those cash flows and then measuring the sensitivity of portfolio value to change in that IRR. 

Duration and convexity help explain the change in portfolio value with parallel shifts in the yield curve. However, most yield curve shifts are not parallel, and involve some measure of steepening, flattening, and butterfly shifts, or some combination of the three. 

Solving the two equations gives Cj = —65.3566 and C2 = 67.1539. This means that to construct the replicating portfolio, you must purchase 67.15 of one-year zero-coupon bonds and sell short 65-36 of the six-month zero-coupon bond. The reason for constructing the portfolio, however, was to price the option. The portfolio and the option have equal values. The portfolio value is known it is the price of the six-month bond at period 0 multiplied by Cj, plus the price of the one-year bond multiplied by Cj, or... 

The OHR is the one that minimizes the risk of the change of the portfolio value that is hedged. The source of this risk is the variance of equation (19.5), which is given by the following equation ... 

Before closing the deal your alternatives should also be considered. Some mutual funds have at times earned 12% annually. These are based on a portfolio of stocks and there is no guarantee that there will not be a loss instead of a profit. If 13,500 is invested at 12% per annum, after 7 years the value of the principal plus interest is 29,800. To request this amount from your roommate in return for financing his car would still be reasonable. Other alternatives would be municipal or government... 

Without having conducted a full elasticity analysis across the entire portfolio, the analysis helps to prove market perceptions such as a higher elasticity exist in one market compared to another market or comparing elasticity between products being perceived to have a different elasticity. The statistical quality of the linear regression analysis in selected months is considered as good in terms of the number of customers involved and the R-squared value proving the applicability of the approach. 

Some readers may have seen pharmaceutical portfolio analysis designed and implemented in a spreadsheet or other computational applications, including the ability to compute Monte Carlo results. While these approaches can indeed be of value, our clients have seen a number of additional insights into pipeline d5mamics, which only a dynamic modeling simulation can provide. 

With the development of the new Ecoflex FS, new performance characteristics have been achieved in addition to improved biodegradabUity and bio-based content. This new Ecoflex FS is used for the development of new Ecovio compounds for specific applications like paper coating and shrink film. Further Ecovio applications, where biodegradability adds value, are under development to extend the portfolio of BASF. 

In stochastic optimization, Cv can be purposefully employed to investigate, denote, and compare the relative uncertainty in models being studied. In a risk minimization model, as the expected value is reduced, the variability in the expected value (for example, as measured by variance or standard deviation) is reduced. The ratio of this change can be captured and described by Cv. Consequently, a comparison of the relative merit of models in terms of their robustness can be represented by their respective values of Cv, in the sense that a model with a lower Cv is favored since there is less uncertainty associated with it. In fact, Markowitz (1952) advocates that the use of Cy as a measure of risk would equally ensure that the outcome of a decisionmaking process still lies in the set of efficient portfolios for the case of operational investments. 

The project portfolio enables an overview on the ongoing research activities. Numerous economic and technical parameters have been proposed to provide a meaningful picture. Examples are attractiveness, strategic fit, innovation, gross/net present value, expected profits, R D expenditures, development stage, probability of success, technology fit, and realization time. Most of these parameters cannot be determined quantitatively, at least during the early phases of a project. 

R D and technology plans can also be analyzed with widely used portfolio analysis (47), which provides visual correlations between variables such as potential value, probability of success, time-to-completion, technology maturity, and project cost as a means of optimizing the planned effort. The analyses can be used to redirect effort and reallocate resources as a project progresses. 

Answers to the first question can be illustrated by giving some examples (see Table 1). Eastman Chemical reengineered its innovation process and doubled the value of its R D portfolio (71—74). A team at Eastman was asked to provide (/) an assessment of the then-current innovation process, (2) a vision of the ideal process, (3) a flow chart of the modified process, (4) measures of the process, and (5) key roles and responsibilities. The team identified four main subprocesses needs identification, concept development, implementation, and market development. 

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