PORTFOLIOS OF AGRICULTURAL MARKET ADVISORY SERVICES: HOW MUCH DIVERSIFICATION IS ENOUGH?
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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.