Question 10

Asset allocation decision that are based on a mean-variance framework requires the

assumption that returns from these assets are normally distributed. However, traditional asset

classes and alternative investments (such as Hedge Funds, Private Equities, and Venture

Capital funds) are shown to have non-normal return distribution. How should an investor

decide the level of alternative investment in their portfolios?

1. Explain what is the mean variance framework?

2. Explain what is meant by normal and non-normal distribution?

3. Explain the impact of using non-normally distributed assets in the MV framework?

4. Give two suggestions to overcome this issue.