A real options perspective on R&D portfolio diversification

Sjoerd van Bekkum, Enrico Pennings () and Han Smit

Research Policy, 2009, vol. 38, issue 7, pages 1150-1158

Abstract: This paper shows that the conditionality of investment decisions in R&D has a critical impact on portfolio risk, and implies that traditional diversification strategies should be reevaluated when a portfolio is constructed. Real option theory argues that research projects have conditional or option-like risk and return properties, and are different from unconditional projects. 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 a fundamentally different risk than a portfolio of unconditional projects. When conditional R&D projects are negatively correlated, diversification only slightly reduces portfolio risk. When projects are positively correlated, however, diversification proves more effective than conventional tools predict.

Keywords: Real; options; Portfolio; analysis; Research; &; Development (search for similar items in EconPapers)
Date: 2009

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Working Paper: A Real Options Perspective On R&D Portfolio Diversification (2009)
Working Paper: A Real Options Perspective on R&D Portfolio Diversification (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:respol:v:38:y:2009:i:7:p:1150-1158

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