A ______ arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.

A. head risk
B. tail risk
C. skew risk

Correct Answer: B

Under the assumption of normal distribution, the probability that returns will move between the mean and three standard deviations, either positive or negative, is 99.97%. This means that the probability of returns moving more than three standard deviations beyond the mean is 0.03%, or virtually nil. The concept of tail risk suggests the distribution has fatter tails. The fatter tails increase the probability that an investment will move beyond three standard deviations.