Distribution and Outliers

Question 1

What does fat-tail distribution mean?

Answer 1

Tails of the distribution stay positive for longer, thereby recognizing outliers such as black swans that exist but are rare

Question 2

What type of distribution does Cauchy distribution show?

Answer 2

Fat-tailed

Question 3

What is covariance?

Answer 3

• a measure used to quantify the relationship between two assets
• key point: when stocks track, they have +cov; when stocks don’t, the have -cov
• risk can be mitigated by collecting assets that have negative covariance, ie, by diversifying the portfolio

Question 4

What is a black swan event?

Answer 4

It’s an outlier or rare event that does happen and has a basis in reality