Negative skew

A return distribution with a long left tail: many small gains and occasional large losses. Standard deviation treats both sides alike, so it understates the risk that matters.

Where you will meet it

Negative skew appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Set out risk measures suited to return distributions that are not normal
  CFA Level I · Alternative Investments

  “Many alternative strategies produce returns that are not normally distributed: option-like payoffs, credit strategies and short-volatility positions generate negative skew and fat tails, where many small gains are punctuated by rare large losses.”

• Explain the carry trade and its link with uncovered interest rate parity, and work out what it earns
  CFA Level II · Economics

  “Returns accrue steadily in calm markets but show negative skew and fat tails: in stress, funding currencies often act as safe havens and surge, erasing years of carry.”

See also

Standard deviation

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with N · Glossary