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

Published online by Cambridge University Press:  28 April 2005

Silvina M. Cabrini ,
Brian G. Stark ,
Scott H. Irwin ,
Darrel L. Good  and
Joao Martines-Filho
Silvina M. Cabrini
Affiliation:
Department of Agricultural and Consumer Economics, University of Illinois at Urbana–Champaign, IL
Brian G. Stark
Affiliation:
Department of Agricultural and Consumer Economics, University of Illinois at Urbana–Champaign, IL
Scott H. Irwin
Affiliation:
Department of Agricultural and Consumer Economics, University of Illinois at Urbana–Champaign, IL
Darrel L. Good
Affiliation:
Department of Agricultural and Consumer Economics, University of Illinois at Urbana–Champaign, IL
Joao Martines-Filho
Affiliation:
Department of Agricultural and Consumer Economics, University of Illinois at Urbana–Champaign, IL
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Abstract

This study analyzes the potential risk-reduction gains from naive diversification 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, because 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 programs.

Keywords

corndiversificationmarket advisory serviceportfoliosoybeansG11Q10Q12Q14
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 37 , Issue 1 , April 2005 , pp. 101 - 114
Copyright
Copyright © Southern Agricultural Economics Association 2005

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