Valuation of Risky Projects and Illiquid Investments Using Portfolio Selection Models

Janne Gustafsson (), Bert Reyck (), Zeger Degraeve () and Ahti Salo ()
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Janne Gustafsson: Ilmarinen Mutual Pension Insurance Company, Porkkalankatu 1
Bert Reyck: University College London
Zeger Degraeve: London Business School
Ahti Salo: Aalto University School of Science

Chapter Chapter 4 in Portfolio Decision Analysis, 2011, pp 79-105 from Springer

Abstract: Abstract 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 intruments. 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.

Date: 2011
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DOI: 10.1007/978-1-4419-9943-6_4

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