A systematic method of project selection based on risk and return criteria and according to the mean-semi-deviation behavioral hypothesis

The uncertain problem of Industrial project selection is the topic of discussion in this article. As the unrealistic assumption of certainty is relaxed in this problem, the decision maker is faced with a two-criterion decision model in which justifying between Risk and Return are the main concerns. The concept of Risk has been revised and the “Semi-Deviation” measure has been proposed to represent the risk of a project. Based on the new Mean-Semi-deviation Behavior, and according to Utility and Modern Portfolio theories, a more efficient method of project evaluation will be presented

Investment Risk Appraisal

Standard financial techniques neglect extreme situations and regards large market shifts as too unlikely to matter. This approach may account for what occurs most of the time in the market, but the picture it presents does not reflect the reality, as the major events happen in the rest of the time and investors are ‘surprised’ by ‘unexpected’ market movements. An alternative fuzzy approach permits fluctuations well beyond the probability type of uncertainty and allows one to make fewer assumptions about the data distribution and market behaviour. Fuzzifying the present value criteria, we suggest a measure of the risk associated with each investment opportunity and estimate the project’s robustness towards market uncertainty. The procedure is applied to thirty-five UK companies and a neural network solution to the fuzzy criterion is provided to facilitate the decision-making process. Finally, we discuss the grounds for classical asset pricing model revision and argue that the demand for relaxed assumptions appeals for another approach to modelling the market environment

Carbon Free Boston: Energy Technical Report

Part of a series of reports that includes: Carbon Free Boston: Summary Report; Carbon Free Boston: Social Equity Report; Carbon Free Boston: Technical Summary; Carbon Free Boston: Buildings Technical Report; Carbon Free Boston: Transportation Technical Report; Carbon Free Boston: Waste Technical Report; Carbon Free Boston: Offsets Technical Report; Available at http://sites.bu.edu/cfb/INTRODUCTION: The adoption of clean energy in Boston’s buildings and transportation systems will produce sweeping changes in the quantity and composition of the city’s demand for fuel and electricity. The demand for electricity is expected to increase by 2050, while the demand for petroleum-based liquid fuels and natural gas within the city is projected to decline significantly. The city must meet future energy demand with clean energy sources in order to meet its carbon mitigation targets. That clean energy must be procured in a way that supports the City’s goals for economic development, social equity, environmental sustainability, and overall quality of life. This chapter examines the strategies to accomplish these goals. Improved energy efficiency, district energy, and in-boundary generation of clean energy (rooftop PV) will reduce net electric power and natural gas demand substantially, but these measures will not eliminate the need for electricity and gas (or its replacement fuel) delivered into Boston. Broadly speaking, to achieve carbon neutrality by 2050, the city must therefore (1) reduce its use of fossil fuels to heat and cool buildings through cost-effective energy efficiency measures and electrification of building thermal services where feasible; and (2) over time, increase the amount of carbon-free electricity delivered to the city. Reducing energy demand though cost effective energy conservation measures will be necessary to reduce the challenges associated with expanding the electricity delivery system and sustainably sourcing renewable fuels.Published versio

Investment Model Uncertainty and Fair Pricing

Modern investment theory takes it for granted that a Security Market Line (SML) is as certain as its "corresponding" Capital Market Line. (CML). However, it can be easily demonstrated that this is not the case. Knightian non-probabilistic, information gap uncertainty exists in the security markets, as the bivariate "Galton's Error" and its concomitant information gap proves (Journal of Banking & Finance, 23, 1999, 1793-1829). In fact, an SML graph needs (at least) two parallel horizontal beta axes, implying that a particular mean security return corresponds with a limited Knightian uncertainty range of betas, although it does correspond with only one market portfolio risk volatility. This implies that a security' risk premium is uncertain and that a Knightian uncertainty range of SMLs and of fair pricing exists. This paper both updates the empirical evidence and graphically traces the financial market consequences of this model uncertainty for modern investment theory. First, any investment knowledge about the securities risk remains uncertain. Investment valuations carry with them epistemological ("modeling") risk in addition to the Markowitz-Sharpe market risk. Second, since idiosyncratic, or firm-specific, risk is limited-uncertain, the real option value of a firm is also limited-uncertain This explains the simultaneous coexistence of different analyst valuations of investment projects, particular firms or industries, included a category "undecided." Third, we can now distinguish between "buy", "sell" and "hold" trading orders based on an empirically determined collection of SMLs, based this Knightian modeling risk. The coexistence of such simultaneous value signals for the same security is necessary for the existence of a market for that security! Without epistemological investment uncertainty, no ongoing markets for securities could exist. In the absence of transaction costs and other inefficiencies, Knightian uncertainty is the necessary energy for market trading, since it creates potential or perceived arbitrage (= trading) opportunities, but it is also necessary for investors to hold securities. Knightian uncertainty provides a possible reason why the SEC can't obtain consensus on what constitutes "fair pricing." The paper also shows that Malkiel's recommended CML-based investments are extremely conservative and non-robust.capital market line, security market line, beta, investments, decision-making, Knightian uncertainty, robustness, information-gap, Galton's Error, real option value

Real Option Valuation of a Portfolio of Oil Projects

Various methodologies exist for valuing companies and their projects. We address the problem of valuing a portfolio of projects within companies that have infrequent, large and volatile cash flows. Examples of this type of company exist in oil exploration and development and we will use this example to illustrate our analysis throughout the thesis. The theoretical interest in this problem lies in modeling the sources of risk in the projects and their different interactions within each project. Initially we look at the advantages of real options analysis and compare this approach with more traditional valuation methods, highlighting strengths and weaknesses ofeach approach in the light ofthe thesis problem. We give the background to the stages in an oil exploration and development project and identify the main common sources of risk, for example commodity prices. We discuss the appropriate representation for oil prices; in short, do oil prices behave more like equities or more like interest rates? The appropriate representation is used to model oil price as a source ofrisk. A real option valuation model based on market uncertainty (in the form of oil price risk) and geological uncertainty (reserve volume uncertainty) is presented and tested for two different oil projects. Finally, a methodology to measure the inter-relationship between oil price and other sources of risk such as interest rates is proposed using copula methods.Imperial Users onl

Minimizing the Cost of Innovative Nuclear Technology Through Flexibility: The Case of a Demonstration Accelerator-Driven Subcritical Reactor Park

Presented is a methodology to analyze the expected Levelised Cost Of Electricity (LCOE) in the face of technology uncertainty for Accelerator-Driven Subcritical Reactors (ADSRs). It shows that flexibility in the design and deployment strategy of an ADSR park demonstrator significantly reduces its expected LCOE. The methodology recognizes in the conceptual design a range of possible technological outcomes for the ADSR accelerator system. It identifies flexibility “on” and “in” the design to modify the future development path in light of such uncertain scenarios. Uncertainty and flexibility are incorporated in the ADSR valuation. The resulting economic assessment is more realistic than typical discounted cash flow analysis that does not consider a range of development outcomes, or the flexibility to change development path

Capturing Risk in Capital Budgeting

NPS NRP Technical ReportThis proposed research has the goal of proposing novel, reusable, extensible, adaptable, and comprehensive advanced analytical process and Integrated Risk Management to help the (DOD) with risk-based capital budgeting, Monte Carlo risk-simulation, predictive analytics, and stochastic optimization of acquisitions and programs portfolios with multiple competing stakeholders while subject to budgetary, risk, schedule, and strategic constraints. The research covers topics of traditional capital budgeting methodologies used in industry, including the market, cost, and income approaches, and explains how some of these traditional methods can be applied in the DOD by using DOD-centric non-economic, logistic, readiness, capabilities, and requirements variables. Stochastic portfolio optimization with dynamic simulations and investment efficient frontiers will be run for the purposes of selecting the best combination of programs and capabilities is also addressed, as are other alternative methods such as average ranking, risk metrics, lexicographic methods, PROMETHEE, ELECTRE, and others. The results include actionable intelligence developed from an analytically robust case study that senior leadership at the DOD may utilize to make optimal decisions. The main deliverables will be a detailed written research report and presentation brief on the approach of capturing risk and uncertainty in capital budgeting analysis. The report will detail the proposed methodology and applications, as well as a summary case study and examples of how the methodology can be applied.N8 - Integration of Capabilities & ResourcesThis research is supported by funding from the Naval Postgraduate School, Naval Research Program (PE 0605853N/2098). https://nps.edu/nrpChief of Naval Operations (CNO)Approved for public release. Distribution is unlimited.

Risk-based methods for sustainable energy system planning: a review

The value of investments in renewable energy (RE) technologies has increased rapidly over the last decade as a result of political pressures to reduce carbon dioxide emissions and the policy incentives to increase the share of RE in the energy mix. As the number of RE investments increases, so does the need to measure the associated risks throughout planning, constructing and operating these technologies. This paper provides a state-of-the-art literature review of the quantitative and semi-quantitative methods that have been used to model risks and uncertainties in sustainable energy system planning and feasibility studies, including the derivation of optimal energy technology portfolios. The review finds that in quantitative methods, risks are mainly measured by means of the variance or probability density distributions of technical and economical parameters; while semi-quantitative methods such as scenario analysis and multi-criteria decision analysis (MCDA) can also address non-statistical parameters such as socio-economic factors (e.g. macro-economic trends, lack of public acceptance). Finally, untapped issues recognised in recent research approaches are discussed along with suggestions for future research

Lignocellulosic Ethanol: The Path to Market

The cost effective production of transport fuels from biomass is essential if the EU aspiration to substitute 10% of transport fuels with sustainable alternatives by 2020 is to be met. The hope, voiced by the Parliament’s Industry and Energy Committee, is that at least 40% of the 2020 target will come from second-generation biofuels, and therein lies the challenge: second-generation conversion technologies are not yet commercial. Multiple pathways are being investigated around the globe, but dominant pathways have yet to emerge and business models have yet to be proven. Nevertheless, expectations are running high and there has been significant investment in R&D in the US, Europe and Asia. The production of ethanol from lignocellulosic biomass is commercially and environmentally one of the most promising options, and in 2007 the US Department of Energy (DOE) provided more than US$1 billion toward lignocellulosic ethanol (LE) projects. Their goal was to make the fuel cost competitive at$1.33 per gallon, when deployed at scale, by 2012. The majority of studies also suggest that LE will result in superior greenhouse gas savings compared to ethanol produced from starch. Despite favourable predictions for cost and environmental performance, market deployment requires practical and plausible development paths that are able to support progress from existing small-scale demonstration plant to large industrial installations. Moreover, these development paths must be sufficiently attractive to persuade developers and investors that lignocellulosic ethanol remains an opportunity worth pursuing

Assessing the Effectiveness of Tradable Landuse Rights for Biodiversity Conservation: An Application to Canada's Boreal Mixedwood Forest

Ecological reserve networks are an important strategy for conserving biodiversity. One approach to selecting reserves is to use optimization algorithms that maximize an ecological objective function subject to a total reserve area constraint. Under this approach, economic factors such as potential land values and tenure arrangements are often ignored. Tradable landuse rights are proposed as an alternative economic mechanism for selecting reserves. Under this approach economic considerations determine the spatial distribution of development and reserves are allocated to sites with the lowest development value, minimizing the cost of the reserve network. The configuration of the reserve network as well as the biodiversity outcome is determined as a residual. However cost savings can be used to increase the total amount of area in reserve and improve biodiversity outcomes. The appropriateness of this approach for regional planning is discussed in light of key uncertainties associated with biodiversity protection. A comparison of biodiversity outcomes and costs under ecological versus economic approaches is undertaken for the Boreal Forest Natural Region of Alberta, Canada. We find a significant increase in total area protected and an increase in species representation under the TLR approach.Biodiversity conservation, Reserve design, Tradable landuse rights