1. Project Portfolio ManagementAn Introduction李俊伟 November 2002Beijing项目管理者联盟, MYPM.NET
2. *Content
Emergence of Project Portfolio Management (PPM)
Portfolio Management in Financial Market
Overview of PPM
PPM, Process and Techniques
3. *The Emergence of Project Portfolio Management1952, Modern Portfolio Theory (MPT), Harry Markowitz, Journal of Finance, Portfolio Selection
1990, Harry Markowitz shared Nobel Prize, dominant approach used to manage risk and return within financial markets
1981, F.Warren McFarian, Portfolio Approach to Information Systems, HBR, to employ a risk-based approach to the selection and management of IT projects.
1990s, a broader use of ideas of portfolio management
1998, John Thorp, The Information Paradox. Portfolio management was used to manage risk and maximize return along a number of dimensions.
Present, portfolio management as central elements of good investment management
5. *Content
Emergence of Project Portfolio Management (PPM)
Portfolio Management in Financial Market
Overview of PPM
PPM, Process and Techniques
6. *The Old Philosophy about Portfolio Don’t put all your eggs in one basket. Risk aversion seems to be an instinctive trait
in human beings.
7. *Return and Risk in Financial Marketexpected returnstandard deviation (%)capital appreciationgrowth
of income0 6 12 18 24 30 3620
18
16
14
12
10
8
6
4
2
0incomeinflationT-billsintermediate-term
government
bondslong-term
government bondslong-term
corporate bondslarge company stockssmall
company
stocksstability
of principal
8. *The Role of Combining SecuritiesThe expected return of a portfolio is a
weighted average of the component expected returns.
9. The Role of Combining Securities10two-security
portfolio risk= riskA + riskB +interactive
riskThe total risk of a portfolio comes from the
variance of the components and from the relationships among the components.
10. *The Role of Combining Securitiesexpected returnrisk better
performance A portfolio dominates all others
if no other equally risky portfolio has a higher expected return, or if no portfolio with the same expected return has less risk. The point of diversification is to achieve a
given level of expected return while bearing the least possible risk.
11. *The Efficient Frontier :
Optimum Diversification of Risky Assetsexpected returnrisk
(standard deviation of returns)impossible
portfoliosdominated
portfoliosefficient frontierThe optimal combinations result in lowest level of risk for a given return
The optimal trade-off is described as the efficient frontier
12. *The Efficient Frontier vs Naive Diversification As portfolio size increases,
total portfolio risk, on average, declines. After a certain point, however, the marginal reduction in risk from the addition of another security is modest.total riskNon-diversifiable
risknumber of securities Naive diversification is the random selection
of portfolio components without conducting any serious security analysis.
13. *Risk Reduction with DiversificationNumber of SecuritiesSt. DeviationMarket RiskUnique Risk
14. *Market or systematic risk: risk related to the macro economic factor or market index
Unsystematic or firm specific risk: risk not related to the macro factor or market index
Total risk = Systematic + UnsystematicComponents of Risk
15. *Two-Security Portfolios with Different Correlations = 113%%8E(r)St. Dev12%20% = .3 = -1 = -1
16. *Relationship depends on correlation coefficient
-1.0 < < +1.0
The smaller the correlation, the greater the risk reduction potential
If= +1.0, no risk reduction is possiblePortfolio Risk/Return, Correlation Effects
17. *Structuring a Portfolio : Asset Allocationattitude
toward riskneed for
returnrealized
return
and risk
with the
passage
of timestocksbondsreal
estatecashforeign
equitiesPortfolioASSET
CLASSESindividual choice asset class mix investment results
18. *Content
Emergence of Project Portfolio Management (PPM)
Portfolio Management in Financial Market
Overview of PPM
PPM, Process and Techniques
19. *What is project portfolio management
Portfolio Management is the project selection process and involves identifying opportunities: assessing the organizational fit; analyzing the costs, benefits, and risks; and developing and selecting a portfolio.
The art of project portfolio management is: doing the right thing, selecting the right mix of projects and adjusting as time evolves and circumstances unfold.
20. *Portfolio Management is: Defining goals and objectives – clearly articulate what the portfolio is expected to achieve
Understanding, accelerating, and making tradeoffs – determine how much to invest in one thing as opposed to something else
Identifying, eliminating,minimizing, and diversifying risk – select a mix of investments that will avoid undue risk, will not exceed acceptable risk tolerance levels, and will spread risks across projects and initiatives to minimize adverse impacts
Monitoring portfolio performance – understand the progress that the portfolio is making toward the achievement of the goals and objectives
Achieving a desired objective – have the confidence that the desired outcome will likely be achieved given the aggregate of investments that are made
21. *Portfolio Management is NotDoing a series of project – specific calculations and analyses, such as return on investment, benefit-cost analysis, net present value, payback period, rate of return, and then adjusting them all to account for risk. – these are project specific
Collecting after-the-market information on projects to produce a report that the organization hopes will satisfy some organizational reporting requirement.
22. *The benefits of Portfolio ManagementHaving a structure in place to select the right projects and immediately remove the wrong projects
Placing resources where it matters, reducing wasteful spending
Linking portfolio decisions to strategic direction and business goals
Establishing logic, reasoning, and a sense of fairness behind portfolio decisions
Establishing ownership amongst the staff by involvement at the right levels
23. *Content
Emergence of Project Portfolio Management (PPM)
Portfolio Management in Financial Market
Overview of PPM
PPM, Process and Techniques
24. *Project Portfolio Management, Process & Technique Four steps
Project Evaluation Matrix
Evaluation Criteria
Examples
25. *Step 1: Define the PortfolioFirst, establish the overall portfolio mission. This mission statement will be used to initially determine what projects are in or out of the portfolio.
The mission statement can be simple, like:The Intranet Portfolio covers all projects to be deployed on the corporate intranet.
26. *Step 2: Gather the ProjectsNow, gather all the projects together that you think might be in the portfolio.
This may not be the list you already have. Some projects, including duplicate efforts, may be underway in other parts of the organization.
27. *Step 3: Begin WeedingOnce the project list is established, begin weeding the list down. Remove projects that:
Are duplicate efforts. Here is an opportunity to save money by pooling two or more efforts into a single project.
Do not meet the mission area. Some projects may be under your wing but do not fit in the mission area. Remove them from your portfolio and place them elsewhere.
28. *Step 4: Begin EvaluatingOnce the portfolio list is set, begin evaluating each project to determine what the overall portfolio will look like.
Using the four-quadrant matrix here, evaluate the projects against two major criteria:
What are the potential risks in implementing this project?
What are the potential benefits in implementing this project?
30. *Using the MatrixThe matrix is used as a scoring tool to map projects against the evaluated level of risk and the evaluated potential beneficial impact of a project.
Projects are evaluated on both risk and benefit from low to high using a series of questions and scores.
Projects are then evaluated in the worksheet and decisions made for inclusion and balancing the portfolio.
31. *Quadrant
IIQuadrant
IQuadrant
IIIQuadrant
IVProject RiskProject BenefitsLowHighHighMatrix Decision RegionsProjects to remove from the portfolioProjects to keep in the portfolio
32. *Evaluation CriteriaThe Evaluation Matrix uses two basic criteria: Risk and Benefit.
Five sample risk areas:
Risk of Completion On Time (Schedule Risk)
Risk of Managing Multiple Organizations (Organizational Risk)
Risk of Technologies Used for the Application (Technological Risk)
Risk of Not Proceeding with the Project (Risk of Not Doing It)
Projects Implementation and Maintenance Costs
Five sample benefit areas:
Number of potential groups or users needing application
Projects Impact on Cross-Functional Activities
Projects Impact on Improving Internal Culture
Projects Impact on Improving External Customer Service
Estimated Benefit/Cost Ratio (Potential Savings or Profits)
33. *Risk Assessment Scorecard- illustrationRisk CategoryWeighted Scale ExampleLow Risk Project ScoreHigh Risk Project ScoreSchedule Risk Assessment25%15Organizational Risk Assessment20%24Technological Risk Assessment20%17Risk of Not Doing Project25%41Project Support Costs10%14TOTAL RISK SCORES100%926
35. *Plot the Project on the MatrixQuadrant
IIQuadrant
IQuadrant
IIIQuadrant
IVProject RiskProject BenefitsLowHighHighOur Low Risk/ Low Benefit Project Might Be Rejected or DelayedOur High Risk/ High Benefit Project Might Be Approved
36. *What is the differencePortfolio Management in the financial market
Project management
37. *
Questions and Answers
38. *
Thank You!
李俊伟
Contact at: george.lee@TalentAllianz.comRoom 318, Jin’Ou Plaza, #2 An Zhen Li,
Chaoyang, Beijing, China 100029
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