Skewness

Skewness measures the asymmetry of a return distribution. It tells you whether extreme outcomes are more likely to be positive (right skew) or negative (left skew).

Types of Skewness:

Type	Value	Meaning	Typical Assets
Positive (Right) Skew	> 0	Occasional large gains	Options (long calls), venture capital
Zero Skew	= 0	Symmetric distribution	Theoretical normal
Negative (Left) Skew	< 0	Occasional large losses	Stock returns, credit strategies

Stock Market Skewness:

• Stock market returns are typically negatively skewed
• This means crashes (large negative moves) are more common and severe than equivalent rallies
• Monthly S&P 500 returns: skewness ≈ -0.5 to -0.7

Why Skewness Matters:

Investment Type	Typical Skew	Implication
Buy & hold stocks	Negative	Tail risk is to the downside
Long options	Positive	Small frequent losses, occasional big wins
Short options	Negative	Small frequent gains, occasional devastating losses
Trend following	Positive	Many small losses, few large wins

Investor Implications:

• Sharpe ratio can be misleading for skewed distributions
• Negatively skewed strategies "look good" until a crash reveals the hidden risk
• Positively skewed strategies may have low Sharpe ratios but better tail outcomes
• Combine negative and positive skew strategies for balance