A large negative event can have a devastating impact such that it significantly
reduces portfolio value e.g.
the 2008 financial crisis
investors dislike stocks with high tail risk (in terms of negative skew-ness) even
though, stocks with negative skew-ness tend to have higher expected returns
Volatility vs. Tail Risk
Three risk metrics are tested:
1. Volatility (VOL)
It is the standard deviation (risk) of the funds return and which is not sensitive
to tail information.
2. Skew-ness (SKEW)
It is a measure of the data asymmetry around the sample mean and negative
skew-ness represents a greater probability for larger negative returns
3. Excess Conditional Value-at-Risk (ECVaR)
It measures the left tail risk. The right tail affects skewness but has no impact
on ECVaR. ECVaR is the fund’s e
xpected tail loss (CVaR), in excess of the
implied expected tail loss with a normal distribution, the same mean and
standard deviation.

** Subscribe** to view the full document.