The Effectiveness of Portfolio Risk Diversification: An Additive Approach by Project Replication. Issue 5 (October 2015)

• Record Type: Journal Article
• Authors: Paquin, Jean-Paul; Tessier, David; Gauthier, Céline
• Is Part Of: Project management journal. Volume 46:Issue 5(2015)
• Page Start: 94
• Page End: 110
• Publication Date: 2015-10
• Subjects: project portfolio risk assessment -- project portfolio management -- fractional and additive risk diversification -- downside risk; Project management -- Periodicals; 658.40405
• DOI: 10.1002/pmj.21526
• Languages: English
• ISSNs: 8756-9728

Abstract

This article proposes a probabilistic approach to project operational risk and project portfolio risk diversification. The analysis rests on a fundamental distinction between a fractional and an additive approach for constructing portfolios. Since the additive approach excludes variance as a measure of risk, the project's operational risk is defined by its probability of loss. Paradoxically, the effectiveness of any firm's portfolio risk diversification process will be negatively related to the operational risk of its representative project. We also present the conditions under which risk management and efficiency management can contribute to the firm's strategic imperative of lowering its operational risk.