Solution to question 1:
OTPPB is facing several issues regarding to its investment:
1. Under the current progressive investment strategy, the pension plan continuously generated high surplus. However, as the long-term surplus growth getting higher, it caused the short-term surplus losses and a rise in contribution rates.
2. Inflation is a problem in terms of OTPPB’s current assets allocation. By 2000, 60 per cent and 18 per cent of the plan’s assets were invested in equities such as stocks in public and private corporates and equity-return derivative contracts, and fixed-income securities, largely government bonds and debentures, respectively. Inflation not only tended to lead to short-term volatility of returns in equity market, but also …show more content…
In other words, the return of the portfolio with timberland investment is higher than the return of the portfolio without timberland investment at any given risk level. Besides, the Sharpe ratios of the portfolio with timberland investment also are greater then the ones of the portfolio without timberland investment, which means this new asset class, timberland investment, clearly adds additional return per unit risk. It is obvious that timberland investment improves the risk-return trade off of a …show more content…
There are no available property-based benchmarks to measure the investment performance of timberland. Moreover, due to timberland investment’s illiquidity and unique characteristics, which is largely independent of economic or financial market conditions, it is inaccurate to use the benchmarks of other financial alternatives such as stocks or bonds to assess the performance.
2. In different areas, prices of the woods of a given size are significantly different. It’s impossible to use an index to measure value of timberland investment over time
The John Hancock Timber Index, Timberland Performance Index, and the National Council of Real Estate Investment Fiduciaries Timberland Index are the existing benchmarks to measure the performance of timberland investment. However, none of these indexes take inflation into consideration while calculating the return. Besides, the John Hancock Timber Index assumes that the value of timberland is only affected by the sale prices and stock prices of the main type of trees, but it omits other factors.
Solution to question
OTPPB is facing several issues regarding to its investment:
1. Under the current progressive investment strategy, the pension plan continuously generated high surplus. However, as the long-term surplus growth getting higher, it caused the short-term surplus losses and a rise in contribution rates.
2. Inflation is a problem in terms of OTPPB’s current assets allocation. By 2000, 60 per cent and 18 per cent of the plan’s assets were invested in equities such as stocks in public and private corporates and equity-return derivative contracts, and fixed-income securities, largely government bonds and debentures, respectively. Inflation not only tended to lead to short-term volatility of returns in equity market, but also …show more content…
In other words, the return of the portfolio with timberland investment is higher than the return of the portfolio without timberland investment at any given risk level. Besides, the Sharpe ratios of the portfolio with timberland investment also are greater then the ones of the portfolio without timberland investment, which means this new asset class, timberland investment, clearly adds additional return per unit risk. It is obvious that timberland investment improves the risk-return trade off of a …show more content…
There are no available property-based benchmarks to measure the investment performance of timberland. Moreover, due to timberland investment’s illiquidity and unique characteristics, which is largely independent of economic or financial market conditions, it is inaccurate to use the benchmarks of other financial alternatives such as stocks or bonds to assess the performance.
2. In different areas, prices of the woods of a given size are significantly different. It’s impossible to use an index to measure value of timberland investment over time
The John Hancock Timber Index, Timberland Performance Index, and the National Council of Real Estate Investment Fiduciaries Timberland Index are the existing benchmarks to measure the performance of timberland investment. However, none of these indexes take inflation into consideration while calculating the return. Besides, the John Hancock Timber Index assumes that the value of timberland is only affected by the sale prices and stock prices of the main type of trees, but it omits other factors.
Solution to question