Abstract
Asset returns have fat tails. Traditional mean-variance analysis, however, assumes that asset returns are normally distributed, with thin tails. A natural extension of the normal distribution is the α-stable distribution, which has fat tails, skewness—and infinite variance, which makes mean-variance optimization impossible. In this white paper, I review the data, examine the investment implications, and do the math of fat tailed, α-stably distributed asset returns.
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