Applying Modern Portfolio Theory and the Capital Asset Pricing Model to DoD's Information Technology Investments

Program Managers (PMs) throughout the Department of Defense (DoD) were directed by the DoD Chief Information Officer to manage information technology (IT) investments as portfolios (to include Mission Areas, Subportfolios, and Components) within the DoD Enterprise. Managing portfolios of capabilities aligns IT with the overall needs of the warfighter, as well as the intelligence and business activities which support the warfighter. This thesis provides the detailed steps that PMs and Program Executive Officers (PEOs) should follow to closely manage their IT portfolios using the concepts described within Harry Markowitz’ Modern Portfolio Theory. The first section will provide a demonstration of allocating revenue generated by a fictitious large corporation to the various sub-corporate levels and then applying Knowledge Value Added (KVA) in order to calculate a Return on Investment (ROI). The foundation of KVA analysis is that each subprocess output must be represented in common units of change; a price per unit of output is generated to allocate both cost and revenue at the subprocess level. The final section will apply a similar KVA analysis to the Naval Cryptologic Carry On Program (CCOP) systems to provide a public sector example.