Formulating Optimal R&D Portfolios

OVERVIEW:R&D managers continue to report their dissatisfaction with currently-available R&D portfolio management models and the need for better and simpler modeling approaches. This article presents a simple, yet theoretically rigorous, method for designing optimal R&D portfolios, those that minimize risk for a given level of return. The model requires only the assumption that the relevant decision makers are risk-averse, a commonly accepted proposition. The model requires as input only an estimate of the probability of success for each project and an estimate of the financial return in case of success and failure. Finally, the model can be executed using only an ordinary EXCEL spreadsheet. The straightforward approach illustrated here should add considerable power and rigor to the design of optimal R&D portfolios.