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

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.