Accounting for Upper Limits on Returns from Conservation Investments in Risk Diversification Strategies

Applications of risk diversification strategies to conservation problems assume returns do not diminish with greater investment. Not accounting for diminishing returns may cause the allocation of investment to a single or limited target site, which may not reflect the fact that additional conservation return will likely decline as more area is protected. The objective of this research is to identify 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 expected return on investment is higher with constrained MPT than with naïve MPT. Our findings also suggest that improvement can be made only if the total budget assigned to a conservation organization is large enough so that portfolio weights from naïve MPT allocate beyond physical limitations that trigger the misallocation of portfolio weights for target sites. For this reason, the divergence between the two models’ outcomes becomes more evident if the total budget for constrained MPT is higher, and the degree of the divergence depends on how physical limitations bind and correct for misleading portfolio weights