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Analyzing the Influence of Risk Models and Investor Risk-Aversion Disparity on Portfolio Selection in Community Solar Projects: A Comparative Case Study

Author

Listed:
  • Mahmoud Shakouri

    (Department of Construction Management, Colorado State University, Fort Collins, CO 80523, USA)

  • Chukwuma Nnaji

    (Department of Construction Science, Texas A&M University, College Station, TX 77843-3337, USA)

  • Saeed Banihashemi

    (School of Built Environment, Faculty of Design, Architecture, and Building, University of Technology Sydney, 15 Broadway, Ultimo, NSW 2007, Australia)

  • Khoung Le Nguyen

    (School of Design and Built Environment, University of Canberra, Canberra 2617, Australia)

Abstract

This study examines the impact of risk models and investors’ risk aversion on the selection of community solar portfolios. Various risk models to account for the volatility in the electrical power output of community solar, namely variance (Var), SemiVariance (SemiVar), mean absolute deviation (MAD), and conditional value at risk (CVaR), were considered. A statistical model based on modern portfolio theory was employed to simulate investors’ risk aversion in the context of community solar portfolio selection. The results of this study showed that the choice of risk model that aligns with investors’ risk-aversion level plays a key role in realizing more return and safeguarding against volatility in power generation. In particular, the findings of this research revealed that the CVaR model provides higher returns at the cost of greater volatility in power generation compared to other risk models. In contrast, the MAD model offered a better tradeoff between risk and return, which can appeal more to risk-averse investors. Based on the simulation results, a new approach was proposed for optimizing the portfolio selection process for investors with divergent risk-aversion levels by averaging the utility functions of investors and identifying the most probable outcome.

Suggested Citation

  • Mahmoud Shakouri & Chukwuma Nnaji & Saeed Banihashemi & Khoung Le Nguyen, 2024. "Analyzing the Influence of Risk Models and Investor Risk-Aversion Disparity on Portfolio Selection in Community Solar Projects: A Comparative Case Study," Risks, MDPI, vol. 12(5), pages 1-16, April.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:5:p:75-:d:1387035
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    References listed on IDEAS

    as
    1. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
    2. Hiroshi Konno & Hiroaki Yamazaki, 1991. "Mean-Absolute Deviation Portfolio Optimization Model and Its Applications to Tokyo Stock Market," Management Science, INFORMS, vol. 37(5), pages 519-531, May.
    3. Dusonchet, Luigi & Telaretti, Enrico, 2010. "Economic analysis of different supporting policies for the production of electrical energy by solar photovoltaics in western European Union countries," Energy Policy, Elsevier, vol. 38(7), pages 3297-3308, July.
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