Additional Volatility Information

There is expected to be a direct relationship between the level and volatility of returns for different investments.  Generally, higher returns generate higher volatility.  This relationship is called the "capital market line".  Timberland has been found to lie above the capital market line (it produces high returns relative to its volatility).  For the period 1960- 2001 Hancock Timber Resource Group reported the following level and volatility for timberland and other financial assets and indexes:

Performance and correlation data can be combined to produce what is called an efficient frontier.  Rational investors desire the highest possible returns for any level of risk.  If the various portfolio mixes relative to highest return for various levels of risk are graphed, the resulting horizon of portfolios is defined as the efficient frontier.  The addition of timberland to a portfolio has been shown to produce major shifts "upward" (higher risk-adjusted returns) in the efficient frontier. 

A standard model for evaluating asset class return and risk is the Capital Asset Pricing Model (CAPM).  Two key results of the CAPM are Beta (nondiversifiable risk of an asset class) and Alpha (rate of return actually earned by an asset class versus the rate of return justified by the level of risk).  Systematic risk increases with the size of Beta.  A Beta of one indicates an asset class that the investor would expect to produce the market rate of return. A Beta of zero should cause expectation of a risk-free rate of return (like US Treasury bills).  Investors would expect asset classes with a negative Beta to earn less than the risk-free rate of return.  Alpha is expected to be zero when capital markets are in equilibrium.  An Alpha greater than zero indicates that the asset class has generated greater returns than expected for its level of risk.  An Alpha of less than zero indicates an overpriced asset class.  CAPM estimates for timberland and other financial asset classes were calculated using the John Hancock Timber Index for 1960 to 1994 by the John Hancock Timber Group and were reported as:

The CAPM results that timberland is a negative BETA, positive ALPHA asset class.  This suggests timberland is a "negative risk" investment and should be required to generate even less return than a risk-free investment.  Timberland also appears to be undervalued in terms of returns generated relative to risk.