APPLYING MODERN PORTFOLIO THEORY TO THE ANALYSIS OF TERRORISM. COMPUTING THE SET OF ATTACK METHOD COMBINATIONS FROM WHICH THE RATIONAL TERRORIST GROUP WILL CHOOSE IN ORDER TO MAXIMISE INJURIES AND FATALITIES

摘要

In this paper, terrorism is analysed using the tools of modern portfolio theory. This approach permits the analysis of the returns that a terrorist group can expect from their activities as well as the risk they face. The analysis sheds new light on the nature of the terrorist group's (attack method) choice set and the efficiency properties of that set. If terrorist groups are, on average, more risk averse, the economist can expect the terrorist group to exhibit a bias towards bombing and armed attack. In addition, even the riskiest (from the terrorist group's point of view) combinations of attack methods have maximum expected returns of less than 70 injuries and fatalities per attack per year.