Abstract
Under the mean-variance efficiency framework, we investigate the role of timberland asset in a mixed-asset portfolio in the United States. Starting from a single period (quarterly) view, we first reveal the crucial role of serial correlation in defining an asset’s financial performance. Accordingly, we modify return, volatility, and correlation for multiyear horizons to account for the nature of long-term investments. Our results show that, although timberland is persistent in all portfolios, private-equity timberland can be substituted by other liquid assets, including public-equity timberland, as the lengthening holding period substantially reduces their volatilities. We conclude that private-equity timberland is a risk diversifier regardless of the length of the investment horizon, whereas public-equity timberland becomes a suitable diversifier only for long-term investors with high risk tolerance.
Study Implications: Serial correlation influences an asset’s return, risk, and correlation with other assets as the investment horizon lengthens. Volatilities of large-cap stocks and public timber real estate investment trusts decay significantly when the holding period is longer than three years. Therefore, these liquid assets become more efficient in the long run. Regardless of the length of the investment horizon, private-equity timberland acts as a risk diversifier in a mixed-asset portfolio, whereas public-equity timberland is a suitable diversifier only for high risk, long-term investors.
Undertstanding the Home Market Effect and the Gravity Equation: The Role of Differentiating Goods
