Valuation of risky projects and other illiquid investments using portfolio selection models

• Main Authors: GUSTAFSSON, Janne, DE REYCK, Bert, DEGRAEVE, Zeger, SALO, Ahti
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: Portfolio selection; investments; portfolio decision analysis; Operations and Supply Chain Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6773; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7768/viewcontent/valuation.pdf
• Institution: Singapore Management University

We develop a portfolio selection framework for the valuation of projects and other illiquid investments for an investor who can invest in a portfolio of private, illiquid investment opportunities as well as in securities in financial markets, but who cannot necessarily replicate project cash flows using financial instruments. We demonstrate how project values can be solved using an inverse optimization procedure and prove several general analytical properties for project values. We also provide an illustrative example on the modeling and pricing of multiperiod projects that are characterized by managerial flexibility.