CFA Level I · CFA Level I Exam · Natural Resources
A timberland investor is deciding between harvesting trees now and delaying harvest when lumber prices are low. Which feature of timberland most likely allows this flexibility to add value relative to other real assets?
Biological growth is the feature that allows flexibility. Trees keep growing while harvest is delayed, so volume and value can rise even when prices are low. Timber is not perfectly correlated with equities, and its income is not contractually fixed.
- ATrees continue to grow biologically, so the stored asset can increase in volume while waitingCorrect
- BTimber prices are perfectly correlated with equity markets
- CTimberland income is contractually fixed by long-term leases
Explanation
Biological growth increases timber volume and often quality over time, so harvest can be deferred when prices are weak, acting like an option. Timber returns are not perfectly correlated with equities, and income is not generally fixed by leases.
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