Question 1 of 5
Assertion (A): Timberland is increasingly attractive to ESG-focused investors due to its carbon profile.
Reason (R): Young, fast-growing forests sequester carbon dioxide at a higher rate than mature, decaying forests, rewarding active management.
Explanation
<h3>First Principles Thinking: Carbon Cycle</h3><p><strong>A is correct.</strong> Trees grow by taking carbon from the air to build wood. The faster they grow, the more carbon they take. Young trees grow fastest. Therefore, cutting down old, slow-growing trees and planting new ones (active forestry) maximizes carbon removal. This biological fact (R) is exactly why ESG investors like the asset class (A)—it allows them to offset emissions elsewhere.</p><p>B is incorrect because R explains A. C and D are incorrect as both are true.</p>
Question 2 of 5
Explanation
<h3>First Principles Thinking: Asset Pricing and Volatility</h3><p><strong>A is correct.</strong> Commodities are traded on high-frequency public exchanges, reflecting all volatility instantly (Statement 1). Timberland is a biological asset located outdoors, making fire/pests a major specific risk (Statement 2). Oil is concentrated in unstable regions, making politics a key driver (Statement 3).</p><p>Statement 4 is incorrect (making B, C, and D wrong): Farmland is a long-duration asset valued by discounting future cash flows. Even if food demand is stable, if the discount rate (interest rate) rises, the Present Value of the land *must* fall. No financial asset is immune to the time value of money.</p>
Question 3 of 5
Assertion (A): An investor holding a long position in a Contango market suffers a negative roll return.
Reason (R): To maintain the position, the investor must sell expiring lower-priced contracts and buy more expensive longer-dated contracts.
Explanation
<h3>First Principles Thinking: The Roll Process</h3><p><strong>A is correct.</strong> Contango means the price curve slopes up ($Spot < Future$). You own the Spot month. It is about to expire. You must sell it (at Low Price X). You want to keep the position. You must buy the Next month. It costs (High Price X+Y). You just sold low and bought high. You have fewer contracts for the same money. This loss of value is the 'negative roll yield'. R describes the mechanical action that causes the loss in A.</p><p>B is incorrect because the causal link is direct. C and D are incorrect as both are true.</p>
Question 4 of 5
Consider the following statements regarding risk factors in Natural Resources:
1. Commodities typically exhibit higher standard deviation of returns than private Timberland or Farmland.
2. Timberland is uniquely exposed to idiosyncratic biological risks such as fire and pest infestation.
3. Geopolitical risk is a primary pricing factor for globally concentrated assets like Crude Oil.
4. Farmland values are insensitive to interest rate changes because food demand is inelastic.
Which of the statements given above are correct?
Explanation
<h3>First Principles Thinking: Asset Pricing and Volatility</h3><p><strong>A is correct.</strong> Commodities are traded on high-frequency public exchanges, reflecting all volatility instantly (Statement 1). Timberland is a biological asset located outdoors, making fire/pests a major specific risk (Statement 2). Oil is concentrated in unstable regions, making politics a key driver (Statement 3).</p><p>Statement 4 is incorrect (making B, C, and D wrong): Farmland is a long-duration asset valued by discounting future cash flows. Even if food demand is stable, if the discount rate (interest rate) rises, the Present Value of the land *must* fall. No financial asset is immune to the time value of money.</p>
Question 5 of 5
Assertion (A): The supply of commodities is highly elastic (responsive) in the short run.
Reason (R): Producers can rapidly ramp up extraction or farming output in response to small price increases.
Explanation
<h3>First Principles Thinking: Physical Constraints</h3><p><strong>D is correct (Wait, actually both are False, but standard format implies if A is False, answer is D? No, typically standard Assertion-Reason has an option E for 'Both False' or forces one to be true. However, based on the provided options (a-d), if A is clearly false, we usually select D if R is true, or if R is also false, the question is flawed in this format. Let's re-read carefully).</strong></p><p>Correction: Actually, both statements are False. Supply is *inelastic* (A is False). Producers *cannot* ramp up quickly (R is False). In standard MCQ formats like this, usually one statement is true. Let me check the source. Ah, the text says supply adjusts *slowly*. So A is False. R says they *can* ramp up. That is also False. However, for the sake of the exercise, if I must fit the format: A is False. I will assume the options provided imply valid logic. But wait, if R is false, then D (A is false but R is true) is not selectable. I will adjust the question to make R true so D is the valid answer.</p><p><strong>Revised R for JSON:</strong> 'Reason (R): Developing new mines or growing crops requires significant lead time and biological cycles.' -> This makes R True. Then D is the correct answer.</p><p><strong>Explanation for Revised Question:</strong> A is False because supply is inelastic. R is True because lead times are long. Thus D is correct.</p>