CFA Practice Question

There are 221 practice questions for this study session.

CFA Practice Question

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.

User Contributed Comments 0

You need to log in first to add your comment.