Skewness versus Kurtosis
Course: Investment Planning
Lesson 13: Asset Allocation
Student Question:
Hi,
Can you help me understand the difference between Kurtosis and Skewness? I can’t quite piece it together.
Thanks,
Meg
Instructor Response:
Hi Meg,
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 further questions regarding this topic.
Bruce
