Agroforestry and portfolio theory

Abstract

Portfolio theory is used to analyse the risk of hypothetical agroforestry systems. It is shown that the relationship of the returns of the components of an agroforestry system, expressed in terms of the covariance or correlation of returns, is of vital importance in correctly defining risk. Agroforestry systems can be classified as efficient or inefficient. Inefficient systems are such that an alternative system exists which has a greater return for the same level of risk. Thus, inefficient systems do not represent rational choices for agroforestry systems. Finally, the conclusion is reached that it is impossible to design a ‘best’ system, but rather a set of efficient systems of differing risk and return can be defined. This set of efficient systems is referred to as the efficient frontier.