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Timber Investments


In recent years, institutional and individual investors have increased their portfolio
allocations to alternative investments, including timberland. The aim of this dissertation
is to provide an overview of the timber asset class and to explore the effects that timber
investments may have on well diversified portfolios using modern portfolio theory.
Timber investments possess some unique characteristics that differentiate them from
investments in other asset classes, the most significant one being biological growth of
trees. The value gain from biological growth is two-dimensional, as trees do not only
grow in volume with age, but they also grow exponentially in value as their diameter
Using historical return data for various different asset classes, a theoretical investment
universe was created to assess the impact that timber investments have on the portfolio
frontier. The study clearly reveals that timber investments offer significant diversification
benefits. When timber is added to the set of available risky assets, the portfolio frontier
shifts and changes shape, reflecting improved risk-return combinations. Whether the
maximum allocation to timber investments is restricted or not, results indicate that the
standard deviation of the portfolio, for various fixed return targets, falls significantly, in
most cases by several percentage points. In sum, results suggest that there are substantial
benefits to be achieved by including timber investments in a portfolio.


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