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Evaluating Forest Management Investments: The Capital Asset Pricing Model and the Income Growth Model

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This article combines an Income Growth Model (IGM) with a nominal and real Capital Asset Pricing Model (CAPM) to evaluate two alternative management regimes using a simulation of two fully regulated Pacific Northwest ponderosa pine (Pinus ponderosa) plantations. The IGM can be used to estimate the cost of capital for nonpublicly traded firms. The IGM was used to estimate a real cost of capital to value the land and timber inventory of the forestry assets. The simulation highlights five findings: (1) the results, both nominal and real, showed that a thinning investment did not reduce financial variability as measured by the beta index of the CAPM; (2) the beta indices indicate the returns to the forestry assets examined were insensitive to nominal or real changes in returns of the market portfolio; (3) a majority of the total variability of the two forestry asset's returns is diversifiable; (4) the forestry assets examined were identified as inferior inflation hedges; and (5) there was no statistical difference between the nominal and real beta indices of the forestry assets examined. Ex post data (particularly market proxy data) cannot prove that the nonthinning regime is ex ante more financially sound, although these results suggest strongly that it is. For. Sci. 37(6):1591-1604.

Keywords: CAPM; IGM

Document Type: Journal Article

Affiliations: Associate Professor, Department of Forest and Wood Sciences, Colorado State University, Ft. Collins, CO 80523

Publication date: 1991-12-01

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.
    Forest Science is published bimonthly in February, April, June, August, October, and December.

    2015 Impact Factor: 1.702
    Ranking: 16 of 66 in forestry

    Also published by SAF:
    Journal of Forestry
    Other SAF Publications
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