3615 Using Portfolio Theory to Improve Resource Efficiency of Invested Capital

Steven S. Byers , College of Business, Idaho State University, Pocatello, ID
John Groth , Texas A&M University, College Station, TX
Tomohiko Sakao , Dept. of Management and Engineering, Linköping University, Linköping, Sweden
Full Papers
  • GIN2012_PFT_revised_sent.pdf (251.2 kB)
  • Justification of the paper:

    The diligent use of capital of all forms contributes to environmental sustainability. Some changes in the use of capital can be regard to fulfill human needs as an instance of a phenomenon sometimes called servicizing, a potential measure to realize sustainable consumption. In practice, in some cases methods in the use of physical product (capital) have changed. For example, product sharing is a well known but still relatively new approach to capital use compared to the traditional style of a user ownership.
    Few studies have investigated effects of the efficient use of resources in the context of portfolio theory and sustainability. For instance, Tukker has argued, in a semi-quantitative manner, the possibility to reduce environmental impacts by up to factor 2 through this type of asset pool offering to meet demand and need fulfillment. However, virtually no literature provides theoretical formulation of quantifying the effects.

    Purpose:

    This paper aims at uncovering the potential contribution of portfolio theory, in a theoretical and quantitative manner, to optimize the employment of capital in the context of environmental sustainability. The provided insights  illustrate and lend support to how portfolio principles applied outside the arena of investments can yield benefits, including the fulfillment of needs with the least resource used – a core principle in sustainability. 

    Theoretical framework:

    To do so, the paper first provides a literature review from the “finance side” and the “engineering side”. Then, it provides an overview of the core issues and implications of portfolio theory. 

    Results:

    It also develops some ideas to support application of portfolio theory, and relates principles of portfolio theory to invested capital. In particular, it will be shown that the “pooling” of assets/services to meet uncertain demands from different users of an asset/service pool yields benefit from diversification effects. 

    Conclusions:

    Those benefits include a reduction in capital employed to fulfill customer needs, more favorable costs structures, a change in total net demand, and derivative benefits to sustainability.  Furthermore, the paper suggests avenues for additional research such as using PFT for the design of products and their reliability.