Selection of an optimal portfolio of projects using the modified model of Markowitz

Abstract

Part of the financial and accounting literature is related to the selection of the optimal portfolio of
financial assets. Harry Markowitz in the 1950s proposed a mathematically strong model for this.
His model provides optimal weights in portfolio assets based on minimizing (maximizing) of the
standard deviation (expected return) of portfolio of financial assets at a certain level of return (risk)
assets. However, in financial and accounting literature, optimal portfolio of projects has received
less attention, largely because of risks and difficulties related to the calculation of risk and return of
projects. In this paper, based on modified Markowitz model and using data from IRIAF
Cooperative Foundation projects (Projects at point zero of the construction as of autumn 2016) and
cash flows derived from econometric studies and interviews with specialists and obtaining a net
present value function using Monte Carlo simulation and the mean and standard deviation, it was
tried to optimize the project based on the said model. Findings based on modified model Markowitz
as well as data relating to five projects of IRIAF Cooperative Foundation at point zero of
construction show that with an increased risk projects (SD), the net present value of projects
increases and also that unlike the efficient center of conventional Markowitz model, efficient center
obtained based on modified model is discontinuous.