Information Technology Portfolio Management Proof of Concept: Modern Portfolio Theory With KVA and ROI Analysis

Abstract

The basic research question guiding this thesis is, How can Modern Portfolio Theory (MPT) be defensibly applied to DoD information technology (IT) portfolio optimization problems? The research will demonstrate how to derive the appropriate raw performance and volatility data required to remain consistent with MPT assumptions and methodology. This thesis accomplishes this research objective by establishing a notional IT beta (β) to apply a MPT approach for asset allocation within the Department of Defense (DoD). Data from three previous RFID implementation case studies were used, in which the knowledge-value added (KVA) methodology was applied to estimate the return on investment (ROI) produced by IT. The KVA methodology is essential for the application of this thesis because it provides the framework for the allocation of surrogate revenue and cost streams into core processes where RFID technology was implemented. The ROI estimates of volatility act as a surrogate for equity price volatility, allowing the application of the Modern Portfolio Theory (MPT) approach in the nonprofit sector.