Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure
Round 1
Reviewer 1 Report
The paper suggests to replace the usual mean variance criterions by an expected gains-loss criterion relative to a benchmark. This is an interesting perspective. The paper mainly lacks mathematical precision and some further explanations to be publishable. The list below is not exhaustive. The authors should themselves improve the paper also elsewhere along the lines indicated by the list:
- Formula (2): x is used for different things during this formula. I suggest to replace x by X in the last expression to stress that X is here a stochastic variable and not the integration variable it was before.
- Line 152: You write that L is the minimum acceptable return. I don't think that is correct. It is just a benchmark that you choose to separate e gains from losses in your objectice.. E.g., you never work with a condition that X>L, so you do accept returns lower than L such that it is not a minimum acceptable return.
- Formula (4): In the formula, the payments are continuous, but in the text afterwards the payments are discrete. You have to decide for either or (or both, but that is mathematically more heavy to express so I would not suggest that you go that way)
- After Formulas (9) and (10) and many other places, there should be no indentation.
- Line 243. I know what an expected value is and what a market value is. But what is an expected market value. Could be actually the expectation of a market value at a later time point, but that's not what you formalize. So, clarify or reword.
- Formula (15): Does this actually mean that your simulation procedure is based on only mean and variance? That seems to underlie your probability model assumption. But, in that case, why does it make a difference whether to use the mean-variance criterion or your proposal. That should only (mainly?) make a difference of more interesting things are in the distribution. Could be because the distribution is actually log-normal, but I am still puzzled. Please, think this through and explain, carefully!
- Line 268: What is meant by the expected value of a distribution?
- Formula (16) and definition in line 268. Explain more carefully where this expected RO comes from. What is it more fundamentally? Can it be zero? If yes, what does that represent intuitively?
Author Response
Please see the attachment.
Author Response File: 
Author Response.docx
Reviewer 2 Report
The presented article deals with an interesting topic - connection of the portfolio theory with the investment projects. It must be admitted that the investment projects of companies are often considered in isolation, i.e. the evaluation of the projects takes place individually. However, this is not true in the practical environment - an entrepreneur must have several projects in the moment at the same time and therefore the internal correlations are immensely important. When it comes to investment decisions, which have to be made in the case of securities portfolio, the same decision-making situations often exist as in the case of investment projects.
The main objective of this study was to propose a method for optimizing a portfolio of investment projects using the Omega measure, considering the possibility of including real options in the analysis. From this citation I can deduce that the authors have a clearer idea on the subject, and this is reinforced in the following points:
- the literature research is based on key opinion leaders;
- the research design is clearly described, and each step of the research is traceable and verifiable;
- the applied omega methodology, with the connection to European real options formed interesting results (on the example of soy production);
- the authors also outlined the limitations of their own results and point out which direction should be investigated soon.
Author Response
Please see the attachment.
Author Response File: Author Response.docx
Round 2
Reviewer 1 Report
Thank you for the revision.
