Deck 4 Distribution Shape & Correlation — Flashcards

Question

How does covariance relate to correlation between two assets?

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Answer

$e x t C o v (R_{i}, R_{j}) = h o_{ij} im ese x t S D_{i} im ese x t S D_{j}$ .

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Question

Why is leptokurtosis important in investment risk analysis?

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Answer

Extreme outcomes occur more often than normal predicts.

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Question

What does leptokurtosis mean in a return distribution?

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Answer

More peaked with fatter tails than normal.

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Question

Why is a negatively skewed return distribution undesirable to investors?

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Answer

It increases downside tail risk despite modest average returns.

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