Tail Risk
The risk of rare, extreme outcomes in the far ends of a return distribution — events that standard models greatly underestimate.
Tail risk refers to the probability of outcomes in the tails of a statistical distribution — events more than 2–3 standard deviations from the mean. In financial markets, these tails are "fat" (more frequent and larger than a normal distribution predicts).
Most portfolio risk models assume normally distributed returns. In reality, markets exhibit excess kurtosis: crashes and explosions happen far more often than the model says they should. Tail risk cannot be eliminated through diversification alone — it requires explicit hedges, position caps, or cash buffers.