A Real Options Perspective on R&D Portfolio Diversification

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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.
Original languageEnglish
Pages (from-to)1150-1158
Number of pages9
JournalResearch Policy
Issue number7
Publication statusPublished - 2009

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  • EUR ESE 30
  • EUR ESE 33


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