Applying Modern Portoflio Theory to Municipal Financial and Capital Budgeting Decision

In this paper, the authors propose that the modern portfolio theory well known in investment literature may be applied to local public financial and capital budgeting decision making. Municipalities can maximize the welfare of their com-munities in a similar manner as investors maximize their returns from their investment portfolios. The authors propose that the local projects should not be evaluated in isolation of each other. Rather, they should be evaluated collectively as a portfolio of individual investments so as to ensure that the overall welfare is maximized for the community. Such maximization process enables decision-makers to see the big picture and make more rational budgeting decision that will better serve the local residents.