What Is Tail Risk. Tail risk refers to an unlikely event. In fact it turns out tails are fatter that is more frequent than many people realize. Using normal statistical methods often underestimates this risk. What is Tail Risk.
A recent example is the financial crisis of 2008 which resulted in extreme price changes in many investments from all. Standard deviation measures the volatility of an instrument with relation to the return on investment from its average return. Tail events are rare occurrences that are well outside of the norm. However by employing proper risk management through buying of assets that profit from an adverse market event Investors can reduce their downsides greatly. Tail risk funds hedge against tail risk which is a type of portfolio risk that appears when there is a significant chance that any particular investment or fund will move more than three standard deviations from the mean. It is the cost of a pre-cisely 30-day put option ex-pressed in basis points of the underlying.
Of the perception of tail risk.
The common technical definition of tail risk is the risk of an investment moving more than three standard deviations from the mean is greater than what is shown by a normal distribution. Tail-value-at-risk TVaR is risk measure that is in many ways superior than VaR. For investors it could be an event that would move asset prices dramatically or an extreme movement in. Of the perception of tail risk. Tail risk events have a small probability of occurring but they do occur from time to time which is why many investors choose to use tail risk funds. Or we could go bankrupt.