Tail risk

Tail risk, sometimes called "fat tail risk," is the financial risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price, above the risk of a normal distribution.[1] Prudent asset managers are typically cautious with the tail involving losses which could damage or ruin portfolios, and not the beneficial tail of outsized gains.[2]

The common technique of theorizing a normal distribution of price changes underestimates tail risk when market data exhibit fat tails.

Tail risk is sometimes defined less strictly: as merely the risk (or probability) of rare events.[3] The arbitrary definition of the tail region as beyond 3 standard deviations may also be broadened, such as the SKEW index which uses the larger tail region starting at 2 standard deviations.