Explanation:

When evaluating investments using only the mean (expected return) and variance (risk), two key assumptions are implicitly made:

1. Returns are normally distributed and can be fully described by their means and variances.
2. Markets are both informationally and operationally efficient.

If these assumptions are violated, additional investment characteristics must be considered. One such characteristic is kurtosis, which refers to the presence of fat tails in the distribution, indicating higher probabilities for extreme returns. This increases an asset's risk beyond what is captured in a mean-variance framework.

For example, many market participants observed that the probability and magnitude of extreme events were underestimated, contributing to the 2008 financial crisis.

• Option B (variance) is incorrect because it assumes returns are normally distributed, which is often not the case due to the higher likelihood of extreme events (kurtosis).
• Option C (skewness) is incorrect because skewness measures the asymmetry of the return distribution, not the probability of extreme events.