Return Skewness is a statistical measure quantifying the asymmetry of the probability distribution of investment returns. A positive skew indicates a higher frequency of small losses and a rare occurrence of large gains, while negative skew suggests frequent small gains offset by occasional, significant losses.
Mechanism
Mathematically, it is computed as the third standardized moment of a return series. This metric precisely quantifies the degree to which one tail of the return distribution is elongated or heavier than the other, offering critical insight into the likelihood of extreme positive or negative return events.
Methodology
Investors analyze return skewness to comprehensively assess the risk-return profile of crypto assets or complex trading strategies. Strategies explicitly targeting positively skewed returns often incorporate options or structured derivatives, whereas assets exhibiting high negative skewness necessitate stringent risk management protocols due to their potential for abrupt, substantial downside movements.
Comparing trading strategies requires a multi-dimensional analysis of risk-adjusted returns, execution costs, and behavioral characteristics under stress.
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