Uncertainty assessment in correlation of construction projects

The use of portfolio theory allows the consideration of correlation between projects and may rationalize the selection of projects and capital budgeting. The expected return of a portfolio may increase or decrease due to project correlation. The correlation between projects is due to several casual factors which are of different importance and contribution to project correlation. The importance and the level of contribution of each factor can be estimated based on experience and judgment. Experience and judgment may easily be expressed in subjective measures rather than mathematical terms. Classical portfolio theory fails to incorporate subjective information. The subjective measures can be translated into mathematical values using fuzzy set theory. A method by which project correlation may be estimated based on experience and judgment is proposed. The method utilizes the fuzzy sets and systems theory to estimate the coefficient of correlation and the judgment uncertainty. Then, the total risk of a portfolio can be estimated