Accounting for the Upper Limit in Returns to Conservation Investments in Risk Diversification Strategies

By: Kang, Nawon; Sims, Charles B.; Armsworth, Paul R.; Mingle, James C. ; Zhu, Gengping; Cho, Seong-Hoon
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Kang, Nawon; Sims, Charles B.; Armsworth, Paul R.; Mingle, James C. ; Zhu, Gengping; Cho, Seong-Hoon, Accounting for the Upper Limit in Returns to Conservation Investments in Risk Diversification Strategies, Journal of Agricultural and Resource Economics, Volume 49, Issue 2, May 2024, Pages 332-349

Applications for risk diversification strategies in addressing conservation problems commonly ignore upper limits in returns, which may not reflect the fact that these economic returns are often beyond the scope of what conservation assets can produce given constraints on species, sites, or activities. This research identifies the consequences of failing to account for upper limits on returns from conservation in a modern portfolio theory (MPT) framework. We find that the amount of risk reduction conservation organizations can achieve with the same level of compromise in the expected return on investment is higher when returns are constrained.