Extreme Events and Portfolio Construction [5]

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Bullet points include: ‘Fat-tailed’ means probability of extreme-sized outcomes seems to be higher than if coming from (usually) a (log) Normal distribution. There are various ways of visualising fat tails in a single return distribution. Easiest to see in format (c) below, i.e. QQ-plots. Note: portfolio construction usually involves multiple assets / risk exposures

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