The following article aims to explain portfolio theory through a global security and strategic intelligence lens to allow the reader to understand better otherwise mind-numbing business and financial management concepts. The first element examined is the impact of the Covid-19 pandemic on investment portfolios and its influence on global markets and corporate risk-taking. Next, the post will explore portfolio theory related to investment in critical infrastructure protection and cybersecurity using a case study of the 2018 Winter Olympics in PyeongChang. The former is necessary to address as the international community is enduring the significant disruption of the global supply chains and where those entities with more adept market speculation at the onset of the pandemic were less negatively affected. The article chose to address the latter because, again, much of the literature on portfolio theory focused on corporate portfolios and not states and were primarily related to external investments over internal capital expenditures.
The global supply chain is at the center of international trade and commerce, and by proxy foreign investment, especially in emerging markets. “Global liquidity” affects corporate risk-taking regarding banking, investments, and other financial decision-making (Bruno & Shin, 2014). However, Covid-19, in particular, the respective state government responses to the pandemic, severely disrupted revenues and cash flows by interrupting the global supply chain and the business operations that relied on them. As a result, industries deemed nonessential instantly devalued and lost significant equity to invest in themselves and other entities (Gompers, Kaplan, & Mukharlyamov, 2020).
President Biden visits factory in the Republic of Korea (20 May 2022) Source.
Similarly, the uncertainty of state restrictions and limitations due to the pandemic further destabilized global markets. Even the now high-demand medical equipment industry suffered losses because of production supply chain issues. Therefore, many investors and firms divested in foreign markets or non-domestic sectors where there was less risk or vulnerability to loss (Baldwin & Freeman, 2021). However, those with more diverse portfolios already or who accurately speculated early in the pandemic and invested in markets and companies expected to see rapid growth or adaptation to the new environment suffered less significant losses.
The monitoring and speculation aspect of portfolio theory also ties heavily into infrastructure development and protection. For example, in anticipation of the announcement of the 2018 Winter Olympics host city, many investors analyzed the likelihood of each winning. They then invested in the firms that the host city and state would likely contract to build the necessary infrastructure to support the games. But, of course, there were enormous risks in this kind of investment.
However, there were other entities, such as sporting retailers and companies known to sponsor the Olympics and athletes, that investors could offset their losses (Hayduk III, 2022). Focusing again on the security aspects of infrastructure, PyeongChang and The Republic of Korea (ROK or South Korea) had to manage their budgetary portfolio in preparation for the 2018 Winter Olympics. They had to ensure that transportation, healthcare, energy, communications, information technology, water, food, financial, and emergency services all received adequate funds to accommodate the massive influx of people and accompanying security threats to each (Lindberg, 2008).
2018 Olympics (Russian participants). Source.
The proximity of an actively hostile state with extensive cyber warfare capabilities also presented unique infrastructure portfolio challenges. Therefore, ROK had to ensure they were adequately defensively prepared and had substantive deterrence capabilities in place beforehand. However, the decision-makers had to balance this against any provocative cybersecurity measures that might antagonize a response from the Democratic People’s Republic of Korea (DPRK or North Korea). Similarly, international agreements related to laws of war still do not clearly define the limitations of offensive, deterrent, and defensive responses to cyber warfare (Uribe et al., 2019). In terms of portfolio management, ROK also had to consider the dependence of other critical infrastructure assets that relied on information technology and security when restructuring their budgets and allocations.
In closing, the Covid-19 pandemic and the infrastructure development and protection of the 2018 Winter Olympics in PyeongChang demonstrated the global security need for diversified and rapidly adaptable portfolios while trading in international markets. Unfortunately, the ongoing global supply chain issues have yet to rebound from the uncertainty of governments’ responses to the pandemic, and many entities characterized as nonessential have not recovered. Finally, state and local portfolios must consider the critical infrastructure requirements they currently and likely will need in the future, analyzing and forecasting no different than any other investor or firm.
Baldwin, R., & Freeman, R. (2021). Risks and global supply chains: What we know and what we need to know (942). Bank of England. https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2021/risks-and-global-supply-chains-what-we-know-and-what-we-need-to-know.pdf
Bruno, V., & Shin, H. S. (2014). Globalization of corporate risk taking. Journal of International Business Studies, 45(7), 800-820. doi:https://doi.org/10.1057/jibs.2014.12
Caballero, R. J. (2021). A model of endogenous risk intolerance and LSAPs: Asset prices and aggregate demand in a “COVID-19” Shock (27044). National Bureau of Economic Research. https://www.nber.org/system/files/working_papers/w27044/w27044.pdf
Gompers, P. A., Kaplan, S. N., & Mukharlyamov, V. (2020). Private equity and COVID-19 ( 2020-140). Becker Freidman Institute for Economics, University of Chicago. https://bfi.uchicago.edu/wp-content/uploads/2020/09/BFI_WP_2020140.pdf
Hayduk III, T. (2022). Who benefitted from the PyeongChang Olympic announcement? Evidence from the South Korean stock market. Journal of Sports Economics, 23(1), 39–75.
Lindberg, T. J. (2008). The critical infrastructure portfolio selection model [Master’s thesis]. Homeland Security Digital Library.
Uribe, E. C., Apolis, J. J., Bonin, B. J., Hinton, J., Kosydar, A., Mairs, C., Sa, T., & Tucker, M. D. (2019). Paradigms and challenges for deterrence in cyberspace (SAND2019-4389). Sandia National Laboratory. https://www.hsdl.org/?view&did=863052
Ben Varlese is a former U.S. Army Mountain Infantry Platoon Sergeant and served in domestic and overseas roles from 2001-2018, including, from 2003-2005, as a sniper section leader. Besides his military service, Ben worked on the U.S. Ambassador to Iraq’s protective security detail in various roles, and since 2018, he has also provided security consulting services for public and private sectors, including tactical training, physical and information security, executive protection, protective intelligence, risk management, insider threat mitigation, and anti-terrorism. He earned a B.A. and an M.A. in Intelligence Studies from American Military University, a graduate certificate in Cyber Security from Colorado State University, and is currently in his second year of AMU’s Doctorate of Global Security program.
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