Tail Risk

Tail Risk suggests that the distribution of financial returns is not a normal distribution, but is skewed and has Fat Tails. The Fat Tails increase the probability that an investment will move beyond 3 standard deviations.

Under the assumption that an investment’s returns follow a normal distribution the probability that returns will move between the mean and 3 standard deviations is 99.97%. The probability of returns moving more than 3 standard deviations is almost 0.

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