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Tail risk is the risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price.[1] In particular, most asset managers are only interested in the downside risk, i.e. moving more than 3 standard deviations below its current price.[2]

The common technique of using a normal approximation to estimate the distribution of changes in price will underestimate the true value for tail risk due to fat tails in financial data.

Tail risk is sometimes defined less strictly, as merely the risk (or probability) of rare events.[3]

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