Managing the retail format portfolio: An application of modern portfolio theory

We apply modern financial portfolio theory (MPT) to managing portfolios of retail formats. The objective of MPT is to maximize overall portfolio return for a given level of portfolio risk. We applied MPT to three prominent hotel firms to determine the ideal mix of formats in their hotel brand portfolios, using revenue per available room (RevPAR) as a proxy for return on investment. We found that all three firms could improve their returns and reduce their risk by reallocating the number of hotel rooms (i.e., scarce resources) across their different retail formats.