Randomness of commodity output and prices in agriculture are well-known phenomena that have plagued both farmers and their lenders as they develop plans and financial programs for the coming year. The same phenomena have plagued researchers who attempt to model the farmer-lender relationships for improved explanations of farmer and lender behavior. Early decision models of resource allocation under risk sought to maximize expected returns. However, in the early 1700s, Bernoulli demonstrated the irrationality of this criterion in explaining gambling behavior. More recently, portfolio theory, as developed by Markowitz and Tobin with extensions by Sharpe and Lintner, has improved our ability to analyze farmer and lender behavior under risk by considering variance as well as the expected value of returns. This paper discusses developments in portfolio theory, reviews its application to farmer and lender behavior, considers its limitations, and suggests several extensions to account for asset liquidity, liquidity risk, and portfolio adjustments. We conclude with recommendations for future application of portfolio theory to farmer and lender behavior.

gaging contradiction, dealers' conspiracies to rule out certain tangential services can be not only unobjectionable COMMUNICATIONS I 769 but positively in the public interest.

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