Why are alternative investment returns often considered non-normal?

• A. They are uniformly distributed
• B. They exhibit a stable pattern with no outliers
• C. They are affected by factors like illiquidity and non-linearity
• D. They align directly with traditional investments

Answer: (C)

Alternative investment returns are often considered non-normal primarily because they are influenced by various factors such as illiquidity and non-linearity. Unlike traditional investments, which may show more predictable and stable returns, alternative investments can experience significant fluctuations in performance due to their unique characteristics.

Illiquidity refers to the difficulty in buying or selling certain assets without affecting their price. This often leads to price distortions that can cause returns to be less predictable and more volatile. Non-linearity suggests that the relationship between risk and return is not straightforward; instead, it may change based on the current market conditions or economic environment. As a result, returns may not follow a normal distribution pattern but may instead show skewness or kurtosis—meaning they can have extreme values or outliers that deviate significantly from the mean.

Therefore, the complexity and unique traits of alternative investments create a return profile that does not conform to the typical normal distribution seen in many traditional investments, making them inherently non-normal in nature.