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Three-Dimensional Efficient Portfolio Frontier: Mean, Variance, and Farm Size

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  • Peterson, Hikaru Hanawa
  • Schurle, Bryan W.
  • Langemeier, Michael R.

Abstract

With continuing trends in increasing farm size and declining number, the impact of size of operation on risk may have significant policy implications. Diversification indexes for 288 Kansas farms from 1984 to 2003 indicated that sample farms had become slightly more diversified over time. Previous findings on the impact of farm size on diversification of farms have been controversial. To capture observed size impacts on enterprise-specific risks, a mean-variance model that allows for variance of enterprise returns to be decreasing in assets allocated is conceptualized. Efficient farm enterprise mixes are estimated using farm level data, showing that the optimal levels of diversification differ for farms of different sizes. For example, small farms should diversify more than large farms to achieve the same level of return. Results from a panel regression analysis showed that the relationship between farm size and diversification depended on how farm size was measured, reconciling the past findings.

Suggested Citation

  • Peterson, Hikaru Hanawa & Schurle, Bryan W. & Langemeier, Michael R., 2005. "Three-Dimensional Efficient Portfolio Frontier: Mean, Variance, and Farm Size," 2005 Annual meeting, July 24-27, Providence, RI 19298, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea05:19298
    DOI: 10.22004/ag.econ.19298
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    References listed on IDEAS

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    3. Mishra, Ashok K. & El-Osta, Hisham S., 2002. "Risk Management Through Enterprise Diversification: A Farm-Level Analysis," 2002 Annual meeting, July 28-31, Long Beach, CA 19711, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    4. Constantinos C. Markides, 1995. "Diversification, restructuring and economic performance," Strategic Management Journal, Wiley Blackwell, vol. 16(2), pages 101-118.
    5. Bryan Schurle, 1996. "The Impact of Size on Yield Variability and Crop Insurance Premiums," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 18(3), pages 415-422.
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    Cited by:

    1. Larsen, Ryan A. & Vedenov, Dmitry V. & Leatham, David J., 2009. "Enterprise-level risk assessment of geographically diversified commercial farms: a copula approach," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46763, Southern Agricultural Economics Association.

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