Abstract
Nobel laureate Harry Markowitz provided investors with a framework to optimize risk and return of their portfolios of stocks and bonds. With a small portfolio of upstream investments as an example, this paper demonstrates how E&P companies can use similar portfolio-optimization methods to determine a mix of projects that provides the minimum risk for a given level of return. Contrasting this portfolio with investments selected by use of traditional capital-allocation techniques, the paper demonstrates how modern portfolio theory provides management with a superior setting for allocating capital by illuminating risk at the portfolio level.
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