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QFCo-Founder
Asked: September 16, 20212021-09-16T01:04:45+05:30 2021-09-16T01:04:45+05:30In: Quants (CFA L1)

CFA L1 QM | Decoding Skewness

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Presenting 2 statements…Decode them:

Statement 1 – A positively skewed distribution is characterized by many small losses & a few extreme gains.

Statement 2: A negatively skewed distribution is characterized by many small gains & a few extreme losses.

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    1. QF
      Best Answer
      QF Co-Founder QFounder
      2021-09-16T01:08:51+05:30Added an answer on September 16, 2021 at 1:08 am
      This answer was edited.

      Decoding the 2 St hereunder:

      Explanation to St 1- This statement basically means that there are “many” with little or negative returns so they are not the outliers while there are only a “few” with extreme gains i.e. they are the outliers and therefore lie on the extreme right side of the positively skewed graph.

      Explanation to St 2: This statement basically means that there are “many” with average or positive returns so they are not the outliers while there are only a “few” with extreme losses i.e. they are the outliers and therefore lie on the extreme left side of the negatively skewed graph.

      Note: In statistics, an outlier is a data point that differs significantly from other observations & has a very small probability of its occurrence.

      CREDITS: Saksham Bajaj

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      • Cancel the best answer
      • BRIJPALSINGH PANDOR
        BRIJPALSINGH PANDOR Advanced
        2021-10-21T11:17:01+05:30Replied to answer on October 21, 2021 at 11:17 am

        Positive Skewness mai risk to reward ratio acha hota hai stock mai
        jane ko thoda hai ane ko bohut sara isyle positive skewness.
        waha se koi bhi stock nikalta hai toh reward acha mileta hai
        our
        Negative Skewness mai risk to reward ratio acha nhi hota waha se
        stock upper toh ja sakta hai lekin jada nhi jaha sakta our niche ane ka chance jada hota hai
        isyle Negative Skewness

        • 1
    2. Mihirr
      Mihirr Beginner
      2021-09-25T19:52:32+05:30Added an answer on September 25, 2021 at 7:52 pm
      This answer was edited.

      To simplify via example

      Considering PE Ratios of comapnies being positively skewed,

      it means that

      Very Few companies have High PE Ratio

      Most companies have PE Ratio less than mean

       

       

       

       

       

       

      CFA L1 QM | Decoding Skewness
      • 0
    3. Bpgoyal@2021
      Bpgoyal@2021 Beginner
      2021-09-28T00:38:49+05:30Added an answer on September 28, 2021 at 12:38 am

      Sir, could you help me plz to solve the question…

      CFA L1 QM | Decoding Skewness
      • 0
      • abhinav.knsl@gmail.com
        abhinav.knsl@gmail.com Advanced
        2021-10-28T16:25:29+05:30Replied to answer on October 28, 2021 at 4:25 pm

        Hello,

        Present value of future cash flows = 8/(1.1) + 108/(1.1)^2

        = 96.52
        at this amount loan can be set-off today

        • 0
    4. Harsh23Gupta
      Harsh23Gupta The Official Nerd https://www.linkedin.com/in/harsh-gupta-7832871b8
      2021-09-29T12:19:41+05:30Added an answer on September 29, 2021 at 12:19 pm
      • Positively skewed means that chances of happening large gain is low
      • Negatively skewed chances of happening large loss is low
      • 0
    5. Satish Jadhav
      Satish Jadhav Beginner
      2021-11-13T11:38:44+05:30Added an answer on November 13, 2021 at 11:38 am

      For statement 1- Can we take example of Lottery ticket.

      For Statement 2- Option Writing

      Please correct me if I am wrong.

       

       

      • 0
    6. ankita2728
      ankita2728 Intermediate
      2022-01-10T12:09:03+05:30Added an answer on January 10, 2022 at 12:09 pm

      Statement 1 – A positively skewed distribution is characterized by many small losses & a few extreme gains.

      Positively skewed or right skewed distribution means the outliers are on positive side (very few items) and most of the values are at lower side.

      Ex. Payoff from Lottery Ticket, Payoff from option buying, Marks of student in difficult exam

      Statement 2: A negatively skewed distribution is characterized by many small gains & a few extreme losses.

      Negatively skewed or left skewed distribution means the outliers are on lower side (very few items) and most of the values are at higher side.

      Ex. Option Selling, Marks of Student in easy exam

      • 0
    7. Shreyati
      Shreyati Beginner
      2022-08-31T01:42:27+05:30Added an answer on August 31, 2022 at 1:42 am

      Statement 1- This is because the in positive skewwed graph, the outliers lies in the right side of the graph, shifting the mean towards it. However the peak of the graph will be at the left side of the mean showing that the maximum units will lie less than the mean. According to people, anything less than the average is considered as loss and this means that their will be frequent however small losses and since there still is some units in the right side of the mean, there can be huge however rare gains.

      Statement 2- This is because in the negative skewwed graph, the outliers lies in the left side of the graph, shifting the mean towards it. However the peak of the graph will be at the right side of the mean showing that the maximum units will lie more than the mean. According to people, anything more than the average is considered as gains and this means that their will be frequent however small gains and since there are still some units in the left side of the mean, there can be huge however rare losses.

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