Leptokurtic

  

Categories: Trading, Investing

We’re not trying to give anyone traumatic flashbacks or anything, but we’d like to take a second to mentally transport ourselves back to our middle-and-high-school math classes.

Remember learning about mean, median, and mode? And remember how the mean is the average of all the values we’re looking at? Okay, good. Now remember bell curves? Yes? Great. If we understand those two concepts, then we can wrap our heads around leptokurtic investments, no problem.

Let’s say we’re looking at a bunch of prices for a particular stock. And now let’s say we calculate the mean price and use standard deviations and other such fun to make ourselves a cute little bell curve. The top of the bell shows the mean, or the average price, while the sides of the bell (called “tails”) show the highest and lowest prices. When the tails of our bell are thicker than the normal bell curve distribution, the stock we’re looking at is said to be “leptokurtic:” it has a higher kurtosis—i.e., higher highs and lower lows—than normal. In other words, the highest price this stock has gone for is higher than what a normal distribution would indicate, and vice versa.

What this means for us as investors is that this particular stock may be a little risky. We could see a high rate of return…but we could also see a big loss. It doesn’t mean we will for sure, but simply that it’s happened before, and there’s potential for it to happen again.

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