Linear solution schemes for Mean-SemiVariance Project portfolio selection problems: An application in the oil and gas industry

Jorge A. Sefair, Carlos Y. Méndez, Onur Babat, Andrés L. Medaglia and Luis F. Zuluaga

Omega, 2017, vol. 68, issue C, 39-48

Abstract: We study the Mean-SemiVariance Project (MSVP) portfolio selection problem, where the objective is to obtain the optimal risk-reward portfolio of non-divisible projects when the risk is measured by the semivariance of the portfolio׳s Net-Present Value (NPV) and the reward is measured by the portfolio׳s expected NPV. Similar to the well-known Mean-Variance portfolio selection problem, when integer variables are present (e.g., due to transaction costs, cardinality constraints, or asset illiquidity), the MSVP problem can be solved using Mixed-Integer Quadratic Programming (MIQP) techniques. However, conventional MIQP solvers may be unable to solve large-scale MSVP problem instances in a reasonable amount of time. In this paper, we propose two linear solution schemes to solve the MSVP problem; that is, the proposed schemes avoid the use of MIQP solvers and only require the use of Mixed-Integer Linear Programming (MILP) techniques. In particular, we show that the solution of a class of real-world MSVP problems, in which project returns are positively correlated, can be accurately approximated by solving a single MILP problem. In general, we show that the MSVP problem can be effectively solved by a sequence of MILP problems, which allow us to solve large-scale MSVP problem instances faster than using MIQP solvers. We illustrate our solution schemes by solving a real MSVP problem arising in a Latin American oil and gas company. Also, we solve instances of the MSVP problem that are constructed using data from the PSPLIB library of project scheduling problems.

Keywords: Semivariance; Project selection; Project portfolio optimization; Benders decomposition; Mean-SemiVariance; Risk; Petroleum industry (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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DOI: 10.1016/j.omega.2016.05.007

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