The effectiveness of portfolio risk diversification

an additive approach by project replication

Article Portfolio Management, Risk Management 1 October 2015

Project Management Journal

Paquin, Jean-Paul | Tessier, David | Gauthier, Céline

How to cite this article:

Paquin, J.-P., Tessier, D., & Gauthier, C. (2015). The effectiveness of portfolio risk diversification: an additive approach by project replication. Project Management Journal, 46(5), 94–110.
This article proposes a probabilistic approach to project operational risk and project portfolio risk diversification. The analysis rests on a fundamental distinction between a fractional and an additive approach for constructing portfolios. Since the additive approach excludes variance as a measure of risk, the project's operational risk is defined by its probability of loss. Paradoxically, the effectiveness of any firm's portfolio risk diversification process will be negatively related to the operational risk of its representative project. We also present the conditions under which risk management and efficiency management can contribute to the firm's strategic imperative of lowering its operational risk.
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