The time-varying role of timberland in long-term, mixed-asset portfolios under the mean conditional value-at-risk framework

Abstract

We investigate the time-varying role of timberland in a mixed-asset portfolio using 15-year rolling windows. Before running portfolio optimizations, we first test normality of return distributions of selected assets including private- and public-equity timberlands, private-equity commercial real estate, public REITs, S&P 500 index, short- and long-term government bonds, and long-term corporate bonds. Given that returns are not normally distributed, we use conditional value-at-risk (CVaR) in lieu of standard deviation as the risk measure and investigate optimal asset allocations under the mean-CVaR framework. Results reveal that weight on timberland in the mixed-asset portfolio does vary with time for both the lowest risk portfolio and the tangency portfolio due to its changing return-to-risk ratio and correlation with other assets. In particular, private-equity timberland asset plays a more significant role in the constrained optimal portfolios invested by 15-year closed-end funds maturing in recent years.