Skewness versus Kurtosis

Course: Investment Planning
Lesson 13: Asset Allocation

Student Question:

Can you help me understand the difference between Kurtosis and Skewness?  I can’t quite piece it together.

Instructor Response:

Entire books have been written on this topic but the following summary should get the points for you on the CFP® Board exam when these topics are tested. 

Skewness measures whether more returns are above or below the mean return.  Investors prefer a skew to the right (positive skew) because the right “tail” is longer than the left “tail.” In a positively skewed distribution, the probability is that more returns will be higher than the mean return.

Kurtosis measures the probability of extreme losses and extreme gains in a distribution.  Stated another way, Kurtosis measures the amount of investment risk in the “tails” of a distribution.  Because investors fear losses more than they desire gains, a negative kurtosis is generally to be avoided.  Put another way, investors prefer “skinny” tails (positive kurtosis) in a distribution and seek to avoid fat tails (negative kurtosis) in a distribution. Let me know if you have questions.