Key term
HIPPO
Highest Paid Person’s Opinion
The book's working vocabulary
Plain language for portfolio practice
Definitions for the ideas Tony uses throughout the book, consulting work, and insights.
PSV
Portfolio Specific Value
Portfolio Specific Value (PSV) is the net effect of the changes required to incorporate a new opportunity into an existing portfolio, such that the portfolio value of an opportunity equals its standalone value plus PSV. PSV is usually negative.
V(portfolio with opportunity) = V(base) + V(opportunity) + PSVKey term
Portfolio Effects
Portfolio effects are the interactions between an opportunity and the rest of the portfolio, including delays, displacements, and capacity constraints, that cause portfolio value to differ from standalone value.
Key term
The Performance Envelope
The performance envelope is the range of outcomes a firm can actually achieve across its important metrics given its opportunity inventory. Knowing the performance envelope reveals tradeoffs between portfolio requirements and constraints and understanding whether your assets are sufficient to achieve your aspirations.
Key term
Optimization Then Simulation
A two-step process that uses deterministic optimization to set the candidate set, then simulation to see the range of outcomes from those decisions. In the book's words: “The optimization model drives the decisions; the simulation model shows the range of outcomes.” A good approach when the working inventory of decisions is large or the simulation runs slowly.
More terms from the book
A vocabulary you can return to
- Complete inventory vs working inventory
- The full opportunity set versus the subset actively carried in analysis.
- Candidate sets
- The alternatives admitted to a portfolio analysis.
- Efficiency metrics
- aPI, bang per buck, benefit-to-cost ratio, fBCR, IRR, MIRR, NPV/I.
- Efficient frontier vs Pareto frontier
- Kenck's usage: the general Pareto frontier, not the specific Markowitz axes.
- Optimizer's Curse
- Selected portfolios tend to disappoint relative to their optimized estimates.
- Law of Inevitable Disappointment
- Companion to the Optimizer's Curse in portfolio selection.
- Rollups with guided selection (RGS)
- Simple aggregation upgraded with structured choice.
- Stochastic aggregation
- Simulation-based rollups.
- Sparse data techniques
- Portfolio methods when data is thin.
- Portfolio fit
- How an opportunity sits against the rest of the book of assets.
- Value of Information
- What resolving an uncertainty is worth before deciding.
- Value of Control
- What changing an outcome is worth, distinct from knowing it.
- Strategic Execution Framework
- Connecting strategy to the portfolio that delivers it.
See the ideas in context The book connects this vocabulary to practical decision frames, examples, and methods.
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