Iceberg Risk

"For all the supposed sophistication and accuracy of quantitative risk models, one key question continues to haunt portfolio managers. Why are stock market crashes and other market outliers so much more frequent than standard portfolio theory predicts?". "The answer is dismayingly simple. Standard theory is so wedded to normal "bell-shaped" risks that it assumes the outliers away. This simplifies calculations and makes for innocuous auditors' reports. But the approach is fundamentally flawed. With a few exceptions, it cannot capture the risks that large chunks of your portfolio soar or dive…