I don’t get why positive skewness and low kurtosis of return distribution means reduced downside risk.
Doesn’t positive skewness mean more chance of negative return?
Positive skewness…longer right tail…few large values
Low kurtosis…has a more rounded peak and shorter, thinner tails
Positive skewness does mean that more of the returns will be toward the left, however the magnitude is small. for instance you may have 100 return outcomes of -1% as opposed to 1 outcome of -100%. So, along with your low kurtosis, your downside risk is smaller in that you have less probability of seeing that -100% return in any one year.
the question is tricky.
it knows that you are really familiar with “negative skewness and high kurtosis” and you will pick that answer everytime you see words such as “hedge fund” “distress securities investing”.
so, it asks you for the opposite.
pay attention to the question, it asks you for the effect of a strategy that counters the above.
Can you clarify ? It looks to me that it asks for alternative investments characteristic.
Low kurtosis - less frequency
I would understand it with “fat tail” in a probability distribution graph.
- Kurtosis: If you “pull” the bell up, you got higher but fat tails on both sides.
- Skewness: If you “pull” the bell to right, you end up with a fat tail to the left.
Both ae somewhat unintuitive, but that’s what they are.
Agreed with passme, it’s a tricky question. I got it wrong two years in a row.