Portfolio theory

Portfolio Theory is concerned with risk and return. The investor is concerned only with the expected values of securities and the interested in the expected value of the portfolio. To maximize the expected value of a portfolio, one neeed only invest in one security (the security with maximum expected return). Thus action based on expected retur only must be rejected as descriptive of actual or rational investment behavior. Is seemed obvious that investors are concerned with risk and return, and these sould be measured for the portfolio as a whole. Therefore, the portfolio theory is about maximize the benefits of investments considering risk and return. In IS area, IT investments can be managed as a portfolio, combining risk and return to maximize the benefits of IT investment and choose the best.

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Acronym

MPT; ITPM; PPM

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Alternate name(s)

IT Portfolio Management, Project Portfolio, IT Project Portfolio, IT Project Portfolio Management

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Main dependent construct(s)/factor(s)

Investment, IT investment

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Main independent construct(s)/factor(s)

Risk (security), Return

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Concise description of theory

Modern portfolio theory (MPT) is a theory of investment which attempts to explain how investors can maximize return and minimize risk. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel prize for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics, and many companies using variants of MPT have gone bankrupt in various financial crises. The theory is used in different areas including IS, to help manage IT investments.

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Diagram/schematic of theory

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Originating author(s)

Markowitz; McFarlan; Turner and Lucas; Weill and Broadbent

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Seminal articles

Markowitz, Harry M. (1952). "Portfolio Selection". Journal of Finance 7 (1): 77–91.

McFarlan, W. F. (1981). Portfolio approach to information systems. Harvard Business Review, v. 59, n°. 5, p. 142-150, 1981.

Turner, J. and Lucas, H. C. (1985). Developing strategic information Systems. In W. Guth. Handbook of Business Strategy. Boston, Warren, Gorham e Lamont.

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Originating area

Financial

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Level of analysis

Organizational

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IS articles that use the theory

ARAL, S. and WEILL, P. (2007). IT Assets, Organizational Capabilities, and Firm Performance: How Resource Allocations and Organizational Differences Explain Performance Variation. Organization Science, v. 18, nº 5, p. 763–780.

ARCHER, N. P. and GHASEMZADEH, F. (1999). An integrated framework for project portfolio selection. International Journal of Project Management, v. 17, nº. 4, p. 207-216.

JEFFERY M. and LELIVELD, I. (2004). Best practices in IT portfolio management. MIT Sloan Management Review, v. 45, n°. 31, p. 40-49.

KUMAR, R.; AJJAN, H. and NIU, Y. (2008). Information technology Portfolio Management: literature review, framework, and research issues. Information Resource Management Journal, v. 21, nº 3, p. 64-87.

MAIZLISH, B. and HANDLER, R. (2005). IT Portfólio Management Step-by-Step: Unlocking the Business Value of IT. John Wiley & Sons, Inc., New Jersey.

PETERS, R. J. and VERHOEF, C. (2008). Quantifying the yield of risk-bearing IT-portfolios. Science of Computer Programming, v. 71, p. 17–56.

STEWART, R. A. (2008). A framework for the life cycle management of information technology projects: ProjectIT. International Journal of Project Management, v. 26, nº. 2, 203–212.

WEILL, P. (1992). The relationship between investment in information technology and firm performance: a study of the valve manufacturing sector. Information Systems Research, v. 3, n°. 4, p. 307-333.

WEILL, P. and BROADBENT, M. (1998). Leveraging the New Infrastructure: How Market Leaders Capitalize on Information Technology. Harvard Business School Press, Boston.

WEILL, P. and OLSON, M. (1989) Managing Investment In Information Technology: Mini Case Examples And Implications. MIS Quarterly, v. 13, n°. 1, p. 3-17.

WEILL, P. and VITALE, M. (1999). Assessing the health of an information systems applications portfolio: An example from process manufacturing. MIS Quarterly, v. 23, n°. 4, p.601-624.

WEHRMANN, A.; HEINRICH, B. and SEIFERT, F. (2006). Quantitatives IT-Portfoliomanagement: Risiken von IT-Investitionen wertorientiert steuern. Wirtschaftsinformatik, v. 48, nº. 4, p. 234- 245.

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