Fuzziness and randomness in investment project risk appraisal

Risk quantification is one of the most difficult tasks associated with investment project risk management, and computer simulation seems to be an especially effective tool for such risk appraisal. This article presents a method for quantification of project-specific risk. When assessing investment project risk it is very common to apply two analytical methods for describing parameter uncertainty: probability distribution and possibility distribution. This study discusses methods for integrating the above-mentioned approaches into a description of the uncertainty of parameters in calculations of effectiveness and investment project risk. The paper presents an example of a computer simulation used for the purpose of an investment project risk assessment. Uncertainty for some parameters of the effectiveness calculation is defined by a probability distribution and by fuzzy sets for others, and a transformation of possibility distributions into probability distributions is thus done. For comparison, the investment risk assessment is undertaken on the assumption that uncertainty distributions of the effectiveness calculation parameters are presented in the form of fuzzy numbers. (c) 2005 Elsevier Ltd. All rights reserved.