An optimal investment strategy tailored to two types of uncertainties

An optimal investment strategy tailored to two types of uncertainties

De Gooijer, S.

Oosterlee, C.W. (mentor)

Electrical Engineering, Mathematics and Computer Science

Numerical Analysis

2011-08-17

People invest in projects to make a profit. If the cost of investment is larger than the revenue, a rational person would not invest. Though these two statements may seem trivial, the reality is that it is often difficult to know what the expected costs and payoffs are. Like with any prediction in the future, there is always a level of uncertainty. The amount of available literature which qualitively deals with risk, greatly outnumbers the available literature on quantitative risk. Through mathematic modelling, we can attempt to quantify this uncertainty and bring it to a minimum. In addition, this allows us to find an optimal investment strategy (Should we invest now? And if so, how much? Or should we invest later or drop the project altogether?). The relevance and importance of such a strategy is obvious to anyone considering investing into a project whether it is in researching a new medicine, planning construction for a new library or producing a new electronics device. Though each mentioned example deals with different types of project-specific problems, it will become apparent that the model we find has a wide range of application. This paper is divided into three parts. First there is a finance part which gives some background information and applies stochastic calculus to derive the main equation for investment opportunities. In the second part, the equation is solved numerically, and the role of the various parameters is discussed. This is then applied to a fictional company considering a large investment project.

investment
linear complementarity

http://resolver.tudelft.nl/uuid:1d0539c6-d414-48e0-906b-f7cbdc37f77c

2011-09-17

Student theses

bachelor thesis

(c) 2011 De Gooijer, S.