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  • Timber Investments
  • Bakkalár
  • 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.

  • 11.10.2008

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