Models of Risk and Financial Crises

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The financial crisis of 2008 reminds us that using the bell-curve as a benchmark for evaluating the likelihood of performance may not be all that useful.  While standard deviation, the coefficient of skewness and the coefficient of kurtosis are useful as measures of the unevenness of an historical performance record, simply having such measures does not provide an adequate probability framework for interpreting a performance record in light of the full risks of investing in portfolios of risky securities.

Author: Paul D. Kaplan, Ph.D., Morningstar, Inc.

The financial crisis of 2008 reminds us that using the bell-curve as a benchmark for evaluating the likelihood of performance may not be all that useful.  While standard deviation, the coefficient of skewness and the coefficient of kurtosis are useful as measures of the unevenness of an historical performance record, simply having such measures does not provide an adequate probability framework for interpreting a performance record in light of the full risks of investing in portfolios of risky securities.

 

Models of Risk and Financial Crises

 

 

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