Advantages of Constructing a Portfolio

Project selection is easy if the set is small else if there are no constraints. It is constraints which makes project selection difficult. 7 min read.


If there were only a single proposed project then there would be no difficulty in the selection process and all of the challenge would be in the execution. Even a set of projects would pose no challenge if there were no limits on the total money available, number of resources that can be used else allowable risk. The existence of constraints is what makes it difficult to choose the best set of projects from the full set of potential ones. And the more constraints added to the mix, the more difficult it will be, in general, to find the best portfolio.

Project Portfolio Selection Example

Consider 20 possible projects. For each project there is a set of standardised characteristics that includes anticipated gains in thousands of dollars per annum, an expected total project cost and an estimate of the risk associated with the project. This risk has been assessed by the project manager and represents the likelihood that the project gains and costs will be achieved exactly as they are captured in the proposal. This risk is due to the many technical and administrative difficulties that may arise during project execution.

Project Portfolio

Project Portfolio Selection Methods

Consider three project portfolio selection methods,

Method 1: A random selection of projects that is continued until the total budget limit is reached. This approach offers a baseline to compare other methods. Any method that does not substantially outperform a random selection of projects is considered as inadequate.

Method 2: A ranking method that depends on a strict ranking of the potential projects by monetary gain. Given this ranked order, it is assumed projects are funded until the total budget limit is reached.

Method 3: A mathematical programming method that is guaranteed to give the project portfolio the highest gain that satisfies all the given constraints. This portfolio cannot be outperformed if the assumptions used to construct the solution are valid and all the important constraints are included.

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Project portfolio results with no constraints,

Project Portfolio - Method Results

This demonstration shows that not only does the mathematical method out performs the ranking method, for this is mathematically guaranteed, but rather illustrates the size of the potential differences between each of the three methods.

Project Portfolio Selection – No Constraints Conclusion

In summary, the ranking method is far superior to the random method, while the mathematical method outperforms the ranking method but the gain is not dramatic. Our next blog will consider constraining the portfolio by considering risk both at the individual project and overall portfolio levels.

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