Hello, Just wanted to confirm that in general, alternative investments are subject to positive skewness & low kurtosis? Or is it the other way around? Thx,
I’m pretty sure i read that it’s the opposite. Negatively skew with high kurtosis. I’ll double check my books tonight.
i’m not sure you can (or should) generalize alternative investments this broadly because so many things fall into this category.
Thx, I was just trying to make sense of one of the answers of the CFAI end of chapter questions.
In general Alternate investments have fat tails on Normal distribution. Which means excess positive kurtosis. This means more returns are centered around the mean, and wider deispersion of extreme returns (outliers). Aloternate investments also have negative skewness as they have more extreme negative outliers than what a normal distribution would indicate. So it is Negative skewness and Positve/ excess kurtosis.
GetSetGo, Thx for answer. So why is it that answer to q. 26 in end of chapter CFAI reading 37 (volume 5) states the following: “The two characteristics of the returns distribution associated with alternative investment strategies that reduce downside risk are positive skewness and low kurtosis.” ? I thought that both would increase downside risk rather than decreasing it? (positive skewness = fatter tails = higher std dev and low kurtosis implying more larger neg returns)?
Positive skewness is mean > median, having big positive outliers. This definately reduces downside risk. Low kurtosis means less distribution in the center(median), but thinner tails and more even distribution which again reduces downside risk. Both low kurtosis and positive skewness are positive attributes and reduce downside risk. I don’t know if alternative investments have these charecterstics. I will look at the book and post again. I don’t have the text book right now.
crablegs Wrote: ------------------------------------------------------- > Thx, > > I was just trying to make sense of one of the > answers of the CFAI end of chapter questions. sorry, i was just blurting something out. not the correct answer and not helpful.
This makes sense now. Thank you. Very helpful.
in general alternative investments have fat tails. I wouldn’t generalize that all kinds of AI have negative skewness. For example, managed futures returns exhibit positive skewness.
While maratikus is probably correct, the CFAI text is very clear in stating that alternative investments have positive skewness and low kurtosis (with the exception of hedge funds, which tend to be the opposite). Just for the tests sake, I would remember their definitions.