Skewness refers to the degree of asymmetry of a distribution, typically of investment returns. A distribution can be positively skewed (long tail to the right) or negatively skewed (long tail to the left). Skewness is an important concept as it provides insights into the probability of extreme returns.
Understanding skewness helps investors assess the risk of an investment. Positive skewness indicates a greater likelihood of extreme positive returns, while negative skewness suggests a higher probability of extreme negative returns. This asymmetry in returns can significantly impact an investor’s risk profile.
Investors should consider skewness in conjunction with other statistical measures like standard deviation and kurtosis to get a fuller picture of risk. Particularly for those looking to avoid investments with a high likelihood of negative extremes, understanding skewness is crucial. However, it's important to remember that skewness is based on historical data and may not predict future performance accurately.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.