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Portfolios Of Agricultural Market Advisory Services: How Much Diversification Is Enough?

  • Cabrini, Silvina M.
  • Stark, Brian G.
  • Irwin, Scott H.
  • Good, Darrel L.
  • Martines-Filho, Joao

This study analyzes the potential risk reduction gains from naive diversification (equal-weighting) among market advisory services for corn and soybeans. The total possible decrease in risk through naive diversification is small, mainly because advisory prices are highly correlated on average. Moreover, since marginal risk reduction benefits decrease rapidly with size, and the cost of holding the portfolios increases linearly due to services' subscription fees, it is optimal to limit portfolio size to a few advisory programs. Based on certainty equivalent measures and two representative risk aversion levels, preferred portfolio sizes are between one and three services. Overall, there does not appear to be strong justification for farmers adopting portfolios with numerous advisory services.

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File URL: http://purl.umn.edu/19013
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Paper provided by NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2004 Conference, April 19-20, 2004, St. Louis, Missouri with number 19013.

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Date of creation: 2004
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Handle: RePEc:ags:ncrfou:19013
Contact details of provider: Web page: http://www.agebb.missouri.edu/ncrext/ncr134/

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  1. Schroeder, Ted C. & Parcell, Joseph L. & Kastens, Terry L. & Dhuyvetter, Kevin C., 1998. "Perceptions Of Marketing Strategies: Producers Versus Extension Economists," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(01), July.
  2. Good, Darrel L. & Martines-Filho, Joao & Irwin, Scott H., 2002. "The Pricing Performance Of Market Advisory Services In Corn And Soybeans Over 1995-2000," AgMAS Project Research Reports 14784, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  3. Sharpe, William F., 1967. "Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(02), pages 76-84, June.
  4. Webber, Rick L. & Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao, 2003. "Evaluation Of Market Advisory Service Performance In Hogs," 2003 Conference, April 21-22, 2003, St. Louis, Missouri 18980, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  5. Isengildina, Olga & Pennings, Joost M.E. & Irwin, Scott H. & Good, Darrel L., 2004. "Crop Farmers’ Use of Market Advisory Services," AgMAS Project Research Reports 37489, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  6. Ron Bird & Mark Tippett, 1986. "Note---Naive Diversification and Portfolio Risk---A Note," Management Science, INFORMS, vol. 32(2), pages 244-251, February.
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