A large negative event can have a devastating impact

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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.
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