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    Welcome to investmentscience.com. The purpose of this site is to promote and discuss modern investment analysis, ideas and techniques as applied to the pricing and management of real assets, or what has come to be known as Real Options.

The content of this site can be classified in the following two categories:

  1. Published content: Articles and howto's of both a conceptual and technical nature, addressing a variety of topics in investment analysis. In addition, we provide the Investment Science newsletter, a periodical with recent developments in investment science.
  2. Resources: Links and reviews of available resources for the Real Options practitioner including consulting, software and training.

    We welcome submission of high quality articles and case studies. Please refer to content submission for suggested guidelines on how to submit material. New material will periodically be posted so remember to visit us again in the near future. Moreover, we provide an archive of the Investment Science Newsletter. You can sign up to receive new issues of this newsletter here. Thank you for visiting investmentscience.com. If you have any comments or questions please send an e-mail to editor@investmentscience.com.

Recent Articles
Real Options Primer Portfolion (6/4/02)
A perspective on Real Options.

Pricing an R&D Venture with Uncertain Time to Innovation (1/28/03)
New product development often requires continued funding in a context where the time to innovation (time to product completion) is uncertain. At the same time, changing market conditions and the competitive environment often alter the profit outlook of the finished product. The high degree of uncertainty in this kind of project calls for periodic adjustment of funding policies and, consequently, a valuation methodology that accurately captures the interplay between uncertainty and management options. This article illustrates such methodology through a simple case study that incorporates important dynamic aspects of an R&D project that cannot be accommodated by traditional discounted cash-flow (DCF) valuation methodologies. Structured Approach to R&D Valuation - Using Investment Science to analyze new ideas (1/28/03)
Many R&D managers have profited from realizing there is value in planning for uncertainty and that delaying some decisions until new information is available often is a value maximizing measure. This case study captures these ideas in a structured manner and illustrates an evaluation methodology based on two key principles.

Recent How To's
Maximum Likelihood Estimation of Mean Reverting Process (2/19/03)
Mean reverting processes are frequently used in real option models. For instance, some commodity prices (or their logarithms) are believed to fluctuate around some value associated with marginal production costs. Fundamental parameter knowledge is perhaps the most meaningful channel for model calibration. Nevertheless, data base methods are often needed to validate a particular model. This note develops a maximum-likelihood (ML) methodology for parameter estimation of 1-dimensional Ornstein-Uhlenbeck (OR) mean reverting processes. Furthermore, the methodology ultimately relies on a one-dimensional search which greatly facilitates estimation and easily accommodtes missing or unevenly spaced (time-wise) observations.

Discounting a mean reverting cash flow (6/26/02)
Sometimes it is desirable to view a cash flow as fluctuating in a random manner around some set level or path. Such behavior can be conveniently modeled by a mean reverting process. A typical mean reverting model that can easily be implemented in a spreadsheet is the exponential Ornstein-Uhlenbeck(O-U) mean reverting process which we will discuss here. Using simulation to calculate the NPV of a project(5/31/02)
Monte Carlo simulation is fast becoming the technology of choice for evaluating and analyzing assets, be it pure financial derivatives or investments in real assets.
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Top How Tos

Maximum Likelihood Estimation of Mean Reverting Process

Discounting a mean reverting cash flow

Using simulation to calculate the NPV of a project

Top Articles

Real Options Primer Portfolion

Pricing an R&D Venture with Uncertain Time to Innovation

Structured Approach to R&D Valuation - Using Investment Science to analyze new ideas

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