Technical Policy Briefing Notes - 5
Portfolio Analysis
Strengths and Weaknesses
Policy Briefs
Portfolio Analysis
Strengths and Weaknesses
A key part of the MEDIATION project has been to identify
the strengths and weaknesses of the different approaches for
adaptation. A summary is presented below.
The main strength of portfolio analysis is that it provides a structured way of addressing (climate change) uncertainty through the identification of suitable combinations of options, expressing the effectiveness of alternative portfolios, and the risk associated with each, in quantitative terms.
This provides a technique for managing the uncertainty from climate change that the analysis of individual adaptation options does not allow.
A major advantage of the approach is it can work with different metrics for returns, assessing benefits in economic terms, or with the analysis of non-monetary (physical) effectiveness. This allows applications in market sectors but also non-market sectors such as biodiversity and ecosystem services.
The use of the efficiency frontier is an effective way of presenting (and visualising) alternative portfolio options, and the trade-offs between risk and reward involved in alternative choices.
The main disadvantage is that the technique is resource intensive, and requires a relatively high degree of expert knowledge and judgement. It relies primarily on the availability of data on effectiveness (return) and variance / co-variance. In the formal application, it requires probabilities (or other assumptions, such as scenario likelihood equivalence).
The main strength of portfolio analysis is that it provides a structured way of addressing (climate change) uncertainty through the identification of suitable combinations of options, expressing the effectiveness of alternative portfolios, and the risk associated with each, in quantitative terms.
This provides a technique for managing the uncertainty from climate change that the analysis of individual adaptation options does not allow.
A major advantage of the approach is it can work with different metrics for returns, assessing benefits in economic terms, or with the analysis of non-monetary (physical) effectiveness. This allows applications in market sectors but also non-market sectors such as biodiversity and ecosystem services.
The use of the efficiency frontier is an effective way of presenting (and visualising) alternative portfolio options, and the trade-offs between risk and reward involved in alternative choices.
The main disadvantage is that the technique is resource intensive, and requires a relatively high degree of expert knowledge and judgement. It relies primarily on the availability of data on effectiveness (return) and variance / co-variance. In the formal application, it requires probabilities (or other assumptions, such as scenario likelihood equivalence).
| Key strengths Provides a structured way of quantifying portfolios of options to address climate change uncertainty, which analysis of individual adaptation options does not allow. Measures “returns” using various metrics, including physical effectiveness or economic efficiency, thus broad applicability in market and non-market sectors. Use of the efficiency frontier is an effective way of visualising results and the risk-return tradeoffs. | Potential weaknesses Resource intensive and requires a high degree of expert knowledge. Relies on the availability of quantitative data (for effectiveness and variance/co-variance). Requires probabilistic climate information to be imposed, or an assumption of likelihood equivalence between alternative scenarios. |
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