Engineering Commons^™

The Effects Of Introducing Skewness Into Capital Rationing Decision Models, Edet Jonathan Ekere

Retrospective Theses and Dissertations

When investment projects are described by subjective probability distributions, the measure of investment worth becomes a difficult task. One of the basic assumptions underlying investment analysis under risk is that decision makers would base their decisions on only the first two statistical moments of the probability distribution of returns. However, the mean and variance can adequately describe only certain symmetric distributions such as the normal and the uniform distributions. As a result, if probability distributions of investment returns are actually asymmetric, the classic first two moments analysis ignores information (skewness) that is needed to make a better investment decision. Even …