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Portfolio Theory: The Contribution of Markowitz’s Theory to Information System Area

  • Pietro Cunha Dolci
  • Antônio Carlos Gastaud Maçada
Chapter
Part of the Integrated Series in Information Systems book series (ISIS, volume 28)

Abstract

Portfolio theory is concerned with risk and return. However, assigning weight to the risk at least equal to the yield was the big news in the 1950s. Until then, both in academia and for the general public, the stock market was no more than a playground for speculators. So in 1952, Nobel laureate Harry Markowitz, then a young doctoral student in operations research at the University of Chicago, demonstrated mathematically, for the first time, why putting all your eggs in one basket is an unacceptable risk strategy, and that diversification is the best deal for an investor or a manager of a company. In Markowitz’s analysis, the expected return and risk of several portfolios were quantified. Therefore, portfolio theory is about maximizing the benefits of investments considering risk and return. In the area of Information Systems (IS) portfolio theory has influenced two major streams ­regarding Information Technology Portfolio Management (ITPM): (a) analysis and classification of IT investments in different dimensions and (b) analysis and classification of IT projects. Both lines of research use Markowitz’s studies as reference to evaluate the trade-off between risk and return on investments in IT projects at the organizational level of analysis. Thus, IT investments can be managed as a ­portfolio, combining risk and return to maximize the benefits of IT investment, and help ­managers to choose the best option and make the best decision.

Keywords

Portfolio Theory Information Technology Portfolio Management Dimensions IT project 

Abbreviations

ATM

Automatic teller machines

CAPM

Capital asset pricing model

E

Expected return

IS

Information systems

IT

Information technology

ITPM

Information technology portfolio management

ROT

Real options theory

TCO

Total cost of ownership

V

Variance of return

Notes

Acknowledgement

The authors acknowledge support from the Brazilian agencies CAPES and CNPq.

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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  • Pietro Cunha Dolci
    • 1
  • Antônio Carlos Gastaud Maçada
  1. 1.Department of Administrative Science, PhD Program, School of BusinessUniversidade Federal do Rio Grande do Sul – PPGA/UFRGSPorto AlegreBrazil

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