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Unit 4: Risk and Return

These risk factors do not make up an exhaustive list, but are only representative of the most Notes
important classifications involved. All the doubts taken together make up the total risk, or the
total variability of return.

Self Assessment

Fill in the blanks:
1. Risk could be .................................... in future depending on its source.

2. .................................... risk is particular to an industry or the company alone.



Caselet Risk-return Tradeoffs in a Mixed Farming System in
Highland Ethiopia

he role of livestock enterprises as a risk management option for subsistence
smallholder farmers in an Ethiopian highland site (Debre Berhan) is examined.
TSpecifically, the paper addresses the issue of whether livestock enterprises can be
an income stabilizing agent in a traditional mixed crop and livestock farming system
representative of important parts of the Ethiopian highlands.

The analysis is based on the application of a stochastic farm-firm linear programming
model. Farm income is the stochastic variable of the model. Technological and resource
constraint sets which approximate those of representative smallholders in the Debre Berhan
area are incorporated into the empirical framework. The data inputs to the model have
been collected in field surveys conducted by ILCA (International Livestock Centre for
Africa) covering the period 1979–1983. Linear programming solutions are obtained for
three situations:

1. A set of solutions where traditional farm technologies apply.
2. A set of solutions where farmers can use one ox, rather than the traditional pair, for
cultivation.

3. A set of solutions where farmers can keep a relatively high-yielding crossbred cow
for milk production to raise cash incomes.
The main empirical results are:

1. In the traditional farming system, increasing sheep flock sizes reduces income
variation.
2. The single ox-traction technology offsets income variation by increasing mean income
as a result of its higher efficiency as compared to the oxen-pair traction technology.
3. The adoption of the crossbred technology results in a lower income coefficient of
variation. This is mainly due to its high mean income. However, due to the labour-
intensive nature of the crossbred cow enterprise, labour becomes expensive. As a
result, a tendency for crop specialization arises.
Source: http://www.sciencedirect.com/science/article/pii/0308521X88900558

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