Tail Risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution. In other words, tail risk measures how likely it is for an investment to experience an extreme event. This type of risk can be especially harmful to investors because it can cause substantial losses in a short period of time.There are several ways to reduce tail risk, including diversifying your portfolio and using derivatives products such as options and futures contracts. By spreading your money across multiple investments, you reduce the chance that any one position will have a large negative impact on your overall wealth.Additionally, using derivatives can help you protect against downside risks while still allowing you to participate in potential upside movements.
While there is no foolproof way to avoid all tail risks, taking these precautions can help minimize your exposure and improve your chances of achieving long-term financial success.
