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FRM Part I · FRM Exam Part I · Measuring Return, Volatility, and Correlation

Compared with a normal distribution having the same mean and variance, a negatively skewed return distribution implies which of the following?

Negative skewness means the left tail is longer, pulling the mean below the median, so large losses are more likely than equally large gains. It says nothing definite about kurtosis, which is a separate measure of tail weight.

  1. AThe mean is greater than the median and large gains are more frequent than large losses
  2. BThe mean is less than the median and the left tail is longer, so large losses are more likely than large gains of equal sizeCorrect
  3. CSkewness equals zero and the tails are symmetric
  4. DKurtosis must be below 3

Explanation

Negative skewness means a longer left tail that pulls the mean below the median. Large losses are more extreme than large gains. Skewness and kurtosis are separate measures, so kurtosis is not restricted.

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