The traditional analytical tool for selection of portfolios is the Markowitz's mean-variance model where the focus is purely on financial return.The final product of this model is the efficient frontier.The choice of the optimal portfolio among infinite possibilities is the final problem,but the mean-variance model does not recommend which one is the best portfolio.A set of heavy-oil projects located in deep-waters regions is used as a case-study to test the several alternatives for portfolio selection.This paper proposes an extension of the mean-variance model by including the following steps:First,an estimation of risk and return of each project.Second,a correlation among returns of each pair of selected prospects and third step is the inclusion of corporative goals,oil characteristics,and exploration and production expenditures.Similarly,we find the efficient frontier of portfolios of projects.The selection of optimum portfolio depends on the diversification level of the investor.If the investor is highly diversified the choice must be the portfolio with a maximum return.Contrarily,the decision may be the portfolio less risky.However,in practice,if bonuses of managers are tied to their performance,the choice for portfolio with lower return and risk is possible,which is a classic tradeoff problem found in several projects where heavy oil characteristics demands a certain technology for costs reduction which is not yet completely dominated.
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