In other words, it is the expected compound annual rate of return that will be earned on a project or investment. Learn risk analysis. Mesokurtic (Kurtosis = 3) — This distribution shows kurtosis of 3 near zero. Kurtosis is a statistical measure that defines how heavily the tails of a distribution differ from the tails of a normal distribution. The skewness measures the combined size of the two tails; the kurtosis measures the distribution among the values in these tails. Platykurtosis: A statistical measure that indicates the level of peakedness of a probability distribution. Positively skewed distribution 3. It is usually done with, Certified Banking & Credit Analyst (CBCA)®, Capital Markets & Securities Analyst (CMSA)®, Financial Modeling & Valuation Analyst (FMVA)™, Financial Modeling and Valuation Analyst (FMVA)®, Financial Modeling & Valuation Analyst (FMVA)®. High kurtosis in a data set is an indicator that data has heavy tails or outliers. If the kurtosis of a distribution is greater than that of a normal distribution, then it has positive excess kurtosis and is said to be leptokurtic. Which website is the best for doing homework on skewness and kurtosis? Positive kurtosis represents that the distribution is more peaked than the normal distribution, whereas negative kurtosis shows that the distribution is less peaked than the normal distribution. Kurtosis is useful in statistics for making inferences, for example, as to financial risks in an investment: The greater the kurtosis, the higher the probability of getting extreme values. A distribution with kurtosis <3 (excess kurtosis <0) is called platykurtic . Excess kurtosis closer to zero or a flat deviation from the mean depicts that the investment will have a lesser probability of generating high returns. It measures the combined weight of the tails relative to the center of distribution. In the era of data technology, quantitative analysis is considered the preferred approach to making informed decisions. Normal distribution kurtosis = 3; A distribution that is more peaked and has fatter tails than normal distribution has kurtosis value greater than 3 (the higher kurtosis, the more peaked and fatter tails). A platykurtic distribution shows a negative excess kurtosis. Our tutors will easily be able to help you in determining the type of Kurtosis curve. If a curve is less outlier prone (or lighter-tailed) than a normal curve, it is called as a platykurtic curve. Several well-known, unimodal and symmetric distributions from different parametric families are compared here. Skewness is a measure of symmetry in distribution, whereas the kurtosis is the measure of heaviness or the density of distribution tails. Dr. Wheeler defines kurtosis as: The kurtosis parameter is a measure of the combined weight of the tails relative to the rest of the distribution. Front Slit Kurti. The blue line in the above picture represents a Mesokurtic distribution. The red line in the above graphical representation depicts a platykurtic distribution or a safe investment. Whenever the kurtosis is less than zero or negative, it refers to Platykurtic. In terms of finance, a leptokurtic distribution shows that the return on investment may be highly volatile on a huge scale on either side. When the excess kurtosis in flat, it means the probability of generating a high return from the investment is low and will generate high returns in only a few scenarios, regularly the return is not so high on the investment. There exist 3 types of Kurtosis values on the basis of which sharpness of the peak is measured. This guide will teach you how to perform dynamic financial analysis in Excel using advanced formulas and functions. To keep learning and advancing your career, the following CFI resources will be helpful: Become a certified Financial Modeling and Valuation Analyst (FMVA)®FMVA® CertificationJoin 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari by completing CFI’s online financial modeling classes and training program! While skewness focuses on the overall shape, Kurtosis focuses on the tail shape. These categories are as follows: Mesokurtic distribution. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. This can be used to define the financial risk of the investment. A statistical measure that defines how heavily the tails of a distribution differ from the tails of a normal distribution, The Poisson Distribution is a tool used in probability theory statistics to predict the amount of variation from a known average rate of occurrence, within, Financial risk modeling is the process of determining how much risk is present in a particular business, investment, or series of cash flows. If the coefficient of kurtosis is less than 3 i.e. Your regular printed kurtis now come with a little twist, … An example is the Uniform Distribution which has a kurtosis = -1.2. How can I understand different types of kurtosis? In finance, such a pattern depicts risk at a moderate level. Meet With Our Teacher. The kurtosis coefficient is a measure of the shape of the tails. Kurtosis is used as a measure to define the risk an investment carries. The images on the right show curves for the following seven densities, on a linear scale and logarithmic scale: 1. The distribution set follows the subtle or pale curve, and that curve indicates the small number of outliers in a distribution. To calculate kurtosis in excel, there is a built-in function Kurt in excel. Platykurtic - a “negative” or … Skewness essentially measures the symmetry of the distribution, while kurtosis determines the heaviness of the distribution tails. So, the further the tails are from the mean the higher the risk of getting an extremely low return and the higher the chance of getting an extremely high return. It indicates a lot of things, maybe wrong data entry or other things. So, kurtosis is all about the tails of the distribution – not the peakedness or flatness. Therefore, an investment whose returns follow a leptokurtic distribution is considered to be risky. Also, the small outliers and flat tail indicate the less risk involved in such investments. To a normal bell-shaped distribution, whereas the kurtosis coefficient is a crucial factor defining! 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