What is 'Cokurtosis'

Cokurtosis is a statistical measure which is used in asset management to measure the extent to which a security and a portfolio will undergo extreme positive and negative deviations from the market portfolio at the same time. It can be thought of as how an asset is “correlated” with the kurtosis of another reference asset or portfolio, or the marginal contribution of an asset to a portfolio’s risk.

BREAKING DOWN 'Cokurtosis'

Cokurtosis is used in fund management to evaluate the potential an asset has to diversify a portfolio, not only in terms of normal risk or volatility, but also in terms of the risk of extreme events – which is known as kurtosis. It measures a security’s risk in relation to the market as a whole – or beta – by using a security's historic price data as the first variable, and historical market data as the second. A risk-adverse investor would prefer lower cokurtosis, as the security's returns would not be much different from the market's returns. While a risk investor would prefer high cokurtosis with the potential for extreme positive returns.

Cokurtosis is a similar measure to coskewness, which estimates a security’s skewness related to the skewness of the market portfolio. It enables portfolio managers to manage risk by ensuring that the securities in a portfolio do not exhibit pronounced negative coskewness. For example, adding an asset to a portfolio that has significant coskewness – such as a hedge fund – will increase or decrease the asymmetry, or skewness, of its returns.

Cokurtosis and coskewness are also known as co-moments, and are used as inputs for portfolio optimization in addition to covariance, which is used to measure the extent to which the returns on two assets move together.

RELATED TERMS
  1. Coskewness

    Coskewness, in statistics, measures how much three random variables ...
  2. Skewness

    Skewness describes the degree of distortion from a normal distribution ...
  3. Kurtosis

    Kurtosis is a statistical measure used to describe the distribution ...
  4. Excess Kurtosis

    Excess kurtosis describes a probability distribution with fat ...
  5. Statistics

    Statistics is a type of mathematical analysis involving the use ...
  6. Normal Distribution

    The normal distribution is a continuous probability distribution ...
Related Articles
  1. Trading

    Trading with Gaussian models of statistics

    The study of statistics originated from Carl Friedrich Gauss and helps us understand markets, prices and probabilities, among other applications.
  2. Investing

    How to Use a Benchmark to Evaluate a Portfolio

    What is an investment benchmark and how is it used to evaluate the risk and return in a portfolio.
  3. Managing Wealth

    Achieve Optimal Asset Allocation

    Minimize risk while maximizing return with the right mix of securities and achieve your optimal asset allocation.
  4. Investing

    How Investment Risk Is Quantified

    FInancial advisors and wealth management firms use a variety of tools based in modern portfolio theory to quantify investment risk.
  5. Investing

    Understanding Volatility Measurements

    Learn how to choose a fund with an optimal risk-reward combination. Find more information about standard deviation, beta, and more.
  6. Investing

    Why Standard Deviation Should Matter to Investors

    Think of standard deviation as a thermometer for risk, or better yet, anxiety.
  7. Managing Wealth

    Modern Portfolio Theory: Why It's Still Hip

    Investors still follow an old set of principles, known as modern portfolio theory (MPT), that reduce risk and increase returns through diversification.
  8. Investing

    Calculating volatility: A simplified approach

    Though most investors use standard deviation to determine volatility, there's an easier and more accurate way of doing it: the historical method.
  9. Investing

    Optimize your portfolio using normal distribution

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
  10. Investing

    Understanding The Sharpe Ratio

    The Sharpe ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset.
RELATED FAQS
  1. How does covariance impact portfolio risk and return?

    Understand how covariance is related to the risk and return of a portfolio of stocks, and learn how covariance is used to ... Read Answer >>
  2. How are negative correlations used in risk management?

    Learn about risk management and how negative correlations between assets are used to diversify and hedge risk associated ... Read Answer >>
  3. What are some common measures of risk used in risk management?

    Learn about common risk measures used in risk management and how to use common risk management techniques to assess the risk ... Read Answer >>
  4. How does market risk differ from specific risk?

    Learn about market risk, specific risk, hedging and diversification, and how the market risk of assets differs from the specific ... Read Answer >>
Trading Center