Tail Risk

Tail risk refers to the chance of extreme events occurring in a distribution of outcomes, typically in finance or investments. These events are found in the "tails" of the probability distribution, representing rare but impactful situations, like market crashes or major economic downturns. While everyday risks are more predictable and common, tail risks are infrequent but can lead to significant losses. Understanding tail risk is crucial for risk management, as it helps investors prepare for and mitigate potential high-impact, low-probability scenarios that could severely affect their portfolios or financial stability.