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Volume 9 Issue 1 April 2006
Using Value-at-Risk for IS/IT Project and Portfolio Appraisal and Risk Management
Stefan Koch
Department of Information Business, Vienna University of Economics and BA, Austria |
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This paper makes the case for adopting a risk measure from the finance sector for IS/IT project and portfolio evaluation. The proposed value-at-risk approach constitutes a well-tested approach in high-risk environments, especially banking, and reports the expected maximum loss (or worst loss) over a target horizon within a given confidence interval. Value-at-risk is computed using either an analytical, parametric approach, or resorting to simulation, either based on historical samples or Monte Carlo methods. The main advantages of using value-at-risk measures are that they are methodologically consistent with modern IS/IT evaluation approaches like real options, that they offer possibilities for management and assessment of IS/IT project portfolios, and that the results are easy to interpret.
Keywords: IT investment, risk management, value-at-risk, project portfolio
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