Other Investment Characteristics

Abstract

The assumption that returns are normally distributed is very convenient, as only the first two moments of the distribution (i.e. the mean and the variance) are required to fully describe the return distribution. However, in the vast majority of cases, financial asset returns are not normally distributed, and higher central moments of the distribution such as skewness and kurtosis must therefore be considered. In addition, the market characteristics of investments are also important for their evaluation. The price of financial assets is affected by the information efficiency and liquidity of the markets. The latter has a significant impact on the level of trading costs. If the assumptions of normal distribution do not apply, and if market information efficiency and market liquidity are not given, higher central moments of the distribution such as skewness and kurtosis, as well as market characteristics, must be considered in order to be able to assess the investment. In addition to the higher central moments of a distribution such as skewness and kurtosis, the longnormal distribution is also presented in this chapter. Afterwards, the market properties of investments such as the information efficiency of financial markets, random movement, and market liquidity and its influence on trading costs are described.