Kurtosis and Financial Returns - Quant Trader Interview Question
Difficulty: Medium
Category: Probability & Statistics
Practice quant interview questions from top firms including Jane Street, Citadel, Two Sigma, DE Shaw, and other leading quantitative finance companies.
Topics: kurtosis, fat-tails, probability, risk-management
Problem Description
What does high kurtosis in a distribution of financial asset returns imply about the likelihood of extreme events (i.e., events far from the mean)? High kurtosis indicates a distribution with 'fatter tails' than a normal distribution.
Consider a stock whose daily returns exhibit high kurtosis. What does this suggest about the probability of observing very large positive or negative returns compared to what you would expect from a normal distribution with the same mean and variance?
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