Application of Portfolio Theory for the optimal choice of dairy veterinary management programs

Abstract

Portfolio theory, an established technique in the selection of stocks and financial instruments for investment purposes, was used as a means of selecting an economic mix of veterinary interventions in a dairy herd. The expected return on investment in six veterinary services and the associated standard deviations (as measures of risk) were calculated using computer simulation modeling techniques. Mathematical programming techniques were applied to identify the optimal combinations of veterinary interventions which maximize expected financial returns while minimizing risk. Parametric analysis was used to show how risk (standard deviation) increases as the required expected return is increased along the efficient risk-return frontier of these optimal combinations. This exercise emphasizes the importance of regarding risk in addition to expected return when considering investment in veterinary services.