I have a DEM built from LiDAR data and the file extension is .tif. When I open this file in ArcMap it seems to be a shaded relief DEM (see the screenshot below).
It happens I want to visualize the DEM colored by elevation. How should I proceed?
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What you have is a hillshade surface built from a LiDAR point cloud. According to ESRI:
A hillshade is a grayscale 3D representation of the surface, with the sun's relative position taken into account for shading the image.
So each pixel of your .tif raster has an hypothetical illumination value given a reference position of the sun.
What you want is a DEM (a bare-earth surface) where each pixel in the raster represents an elevation value. As stated by Jeffrey Evans it is not possible to backwards converting hillshade values into elevation.
The best alternative would be to try acquiring the raw LiDAR data and built the DEM from scratch. For example, see: