Skewness and Kurtosis: practical guide for portfolio risk

Why skewness and kurtosis matter

Average return and volatility are not enough to describe portfolio risk. Skewness and kurtosis help read distribution shape and tail behavior.

Skewness: asymmetry of returns

• Positive skewness: more right-tail outcomes (occasional large gains).
• Negative skewness: more left-tail outcomes (occasional large losses).

For many strategies, negative skewness means losses can arrive suddenly and be larger than expected by normal assumptions.

Kurtosis: thickness of tails

Kurtosis captures how heavy tails are relative to a normal distribution.

• Higher kurtosis means more extreme events in both tails.
• Lower kurtosis means fewer extremes.

In practice, high kurtosis signals that tail risk controls (VaR/CVaR, limits, sizing) are critical.

Practical interpretation

• Similar volatility, different skewness: downside risk may still differ a lot.
• Similar VaR, different kurtosis: tail events can still be more severe in one portfolio.

Use skewness and kurtosis together with VaR, CVaR, and drawdown.

Next step

• Review portfolio risk in the Wallible app
• Compare scenarios in portfolio backtesting
• Read related guides: VaR 95%/99% , CVaR 95%/99% , Maximum Drawdown