ectopic 发表于 2010-4-7 09:42
That is because generally, an investor is only worried about downside risk.

Ask yourself. Do you prefer extremely positive returns, or extremely negative returns?

ectopic 发表于 2010-4-7 16:18
What I'm saying is standard deviation is an incomplete measure of risk.

When a buy and hold investor encounters a positively skewed distribution, and standard deviation is his only measure of risk, he is going to interpret the higher standard deviation as higher risk than normal. But the extra risk is biased to the upside, which is a good thing.

For a negative skew, the buy and hold investor would also intrepret the higher standard deviation as higher risk than normal. But in fact, it's even worse than he thinks, because the extra risk is biased to the downside.