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Efficient Combinations of Timber and Financial Market Investments in Single-Period and Multiperiod Portfolios

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Abstract:

This paper presents single-period and multiperiod portfolio expected returns and standard deviations for portfolios constructed from eight sawtimber investments and four financial market investments. Four of the timber investments are from growing timber crops in the South (southern pine, ash, gum, oaks) and four are from growing timber crops in the Midwest (white pine, red pine, aspen, and red oak). The financial market investments are common stocks, corporate bonds, U.S. Government bonds, and U.S. Government Treasury bills. Portfolios are computed two ways: (1) maximizing a quadratic utility function, which is inherently a single-period approach, and (2) maximizing a power utility function, which has been shown to be a suitable multiperiod optimization. The two models provide similar results showing that portfolio diversification across timber species and financial market investments is often appropriate. Risk-tolerant investors may choose only timber investments, while more risk-averse investors will hold both timber and financial market investments. The highest risk-highest return portfolio consists of red pine, while the lowest risk-lowest return portfolio is primarily made up of Treasury bills. This paper shows that as the investment horizon lengthens, the expected compound long-run portfolio return decreases, the standard deviation falls, and the most risky, efficient single-period portfolios are dominated by some less risky multiperiod portfolios. For. Sci. 37(2):461-480.

Keywords: Forest management; nonlinear optimization; power utility maximization; quadratic utility maximization

Document Type: Journal Article

Affiliations: Assistant Professor of Forest Management, School of Natural Resources, The University of Michigan, Ann Arbor 48109-1115

Publication date: June 1, 1991

More about this publication?
  • Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
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