Downside vs. Symmetric Risk in Conservation Portfolio Design to Manage Climate-Change Uncertainty

Recent work uses mean-variance portfolio theory to identify optimal spatial conservation planning in the face of spatial variation in future benefits from uncertainty in climate change. Use of variance to measure risk may lead to inefficient portfolio allocation decisions when returns do not follow a multivariate normal distribution or when conservation agents are loss averse. In this paper, we use downside risk measures to evaluate the risk-reward tradeoffs involved in optimal conservation planning and compare the results against the standard mean-variance approach to identify the significant differences in optimal portfolio allocation strategies based on the measure of risk used. We use a case study of the current and potential future status of 147 bird species in the eastern United States to illustrate the difference in the optimal spatial targeting of bird conservation activity in this region subject to uncertain climate scenarios. We find that when returns are multivariate normal, the use of either risk measure arrives at identical portfolio allocation strategies. However, if the returns are not jointly normal, the choice of risk measure significantly alters the portfolio allocation decisions and also changes the risk-return profile.