Very few companies can boast the kind of resources or investment budget to engage in every viable project proposal that they identify. A key question of project portfolio management thus becomes: how do I select the projects I invest in, so that I maximise the value I will obtain from them, given my limited investment budget / resources?
The efficient frontier theory aims at answering that question.
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The Efficient Frontier helps answer some important questions:
In addition, the visual nature of the Efficient Frontier helps create a different perspective by helping managers and decision-makers understand the relationship between the value created by the portfolio and the costs incurred, and better measure the trade-offs entailed by the decisions they take.
The Efficient Frontier method is particularly useful for industries or business models where:
because it builds the optimal portfolio before the projects are started. So this method is particularly used in the pharmaceutical and biotech, aerospace & defense and chemical industries.