Some Problems in Applying the Continuous Portfolio Selection Model to the Discrete Capital Budgeting Problem

Sanford Baum, Robert C. Carlson and James V. Jucker

Journal of Financial and Quantitative Analysis, 1978, vol. 13, issue 2, 333-344

Abstract: Capital budgeting can be described as the problem of allocating scarce capital among a number of investment opportunities in such a manner that the outcome most preferred by a decision maker will result. When a single, mathematically explicit criterion is assumed, mathematical programming techniques can be applied. However, a single criterion, such as maximizing the return on investment or minimizing the risk of losing a sizable fraction of the original investment, is not appropriate for a significant number of real-world decision makers for whom two or more criteria, e.g., a judicious combination of return on investment and risk, are important. It has been argued [1] that it is usually not possible to obtain an explicit utility function for the decision maker and, consequently, that it is usually not possible to apply conventional (optimizing) mathematical programming techniques to find the most preferred outcome.

Date: 1978
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