Assessing risk in the Paarl/Berg River region by means of various portfolio diversification models

[摘要] ENGLISH ABSTRACT:The need to take account of risk in agriculture must be part of every decision taken inagriculture. Yet risk is nothing to be too afraid of Risk is a choice rather than a fate.The actions we dare to take, which depend on how free we are to make choices, are whatthe theory of risk is all about. The task is rather to manage risk effectively, within thecapacity of the farmer, business or group in order to withstand adverse outcomes. Somemethods of managing risks are feasible for all types of farms. Others are only feasible forcertain sizes and types of farms. Therefore, farmers in general need a systematictechnique that will enable them to choose an efficient investment strategy from among allfeasible strategies. Specifically, given n risky assets (such as the different enterprises inthe PaarlIBerg River region), it is essential to seek a diversification strategy which yieldsa portfolio lying on the efficient frontier.The research question was whether different diversification models (Markowitzdiversification model, Single Index Model and the Capital Asset Pricing Model) that arenormally applied in capital markets for the construction of optimal diversified portfoliosconsisting out of different shares, are also applicable on risky portfolios in agriculturecomprising different enterprises in the PaarlIBerg River region.The efficient frontier can be seen as the graphical representation of a set of portfolios thatmaximize expected return for each level of portfolio risk. The Microsoft Excel portfoliooptimiser (SOLVER) programme was used to illustrate the investment proportions,expected returns, and standard deviations of the portfolios ofthe efficient frontier.The Single Index Model (SIM) can be used as an alternative to Markowitz diversificationmodel. It drastically reduces the number of parameters needed to be estimated and yieldsthe efficient set relatively easily without the technical difficulties characterising the fullranksolution. However, if the SIM assumptions are in contradiction to the actual data,the simplification of the calculations is achieved at the cost of getting imprecise results.The simplicity of SIM calculations was attained at a cost of constructing a sub-optimalportfolio, which does not lie on the corresponding efficient frontier.The Capital Asset Pricing Model (CAPM) reveals that there is a great deal of systematicrisk in relation to the portfolio enclosed in this study. By using the CAPM it is possibleto determine which part of the risk the producer can control (non-systematic risk) andwhich part the producer has no control over (systematic risk). The proportions ofsystematic risk that can be diversified away are small, relative to the total risk of theFarm Sector Portfolio.The success of these models depends on the efficiency of the market, as weU as a large,up-to-date and reliable data source. Many younger cultivars could not be included in thisstudy, due to the limited availability of data. In the next few years as data becomeavailable, it will be possible to construct efficient frontiers out of a wider range ofenterprises. Different enterprises and cultivars will increase the number of alternativeuses for natural resources in the PaarlIBerg River region through diversification. Thiswill result in more choices for the farmer, and more flexibility in the decision-makingprocess. Without reliable data, the result will be garbage in, garbage out.

[发布机构] Stellenbosch University