At Captario, we continuously explore risk and return metrics for R&D portfolio assets, and we strive to stay on top of the many excellent discussions about the topic. Here are some charts illustrating risk and value to add to the debate.
Scroll below for detail.
Upper Left: This is a standard box plot that shows the full spread of NPV for the four portfolios used in this example. It’s an excellent overview of portfolio value and risk, making it simple to compare options.
Upper Right: This is the standard efficient frontier chart. It shows NPV and NPV SD on the y- and x- axis. There is an added cost represented by bubble size. The cost dimension is essential for discrete portfolios, and it is not present in the standard efficient frontier.
Lower Left: Some experts have suggested using Value at Risk as the risk measure instead of SD. When running simulations, one takes the 5th percentile and shows that as VaR with 95% confidence that will not lose more than x. In this case, it will be much easier to communicate the risk as a monetary value (instead of SD) to portfolio stakeholders.
Lower Right: Expected Gain is the mean of all positive NPVs, and Expected Loss is the mean of all negative NPVs. These metrics are good to use together with the box plot in the upper right.
The charts show different perspectives, and they all add value for decision-makers.
Which ones do you prefer? Do you have other charts and metrics to display value and risk?