Portfolio analysis applied to small hydroelectric plant investment

The "Portfolio Theory" has been largely employed on stock markets, aiming to improve the relation between risk and return. The new model just implanted in the Brazilian electrical system allows more chances to entrepreneurs through the participation as agents on power generation. The construction of small hydroelectric power plants (SHP) have been incentived. The decision concerning investment options has been based on standard economic analysis, e.g. "Net Present Value"-NPV. This paper proposes a probabilistic methodology, accounted uncertainties of economical and climate orders, applied to five SHP in the state of Bahia, in Brazil. These are analyzed, firstly with standard techniques. From, the four SHP considered viable will constitute our examples for the application of Portfolio Theory techniques, and the best option is identified using the "efficient frontier" developed by Markowitz, and some correlations coefficients are used.