Looking to explain tail risk to your clients? Let's use a simple example.
Imagine your soccer team is in a tournament. Most of the teams they'll face are pretty good, but there are a few exceptional ones that are really tough to beat. These super tough teams are like "tail events" in the financial world - they don't come along often, but when they do, they can seriously test your team's strength.
The Tail Risk Score is like a measure of how well your team can handle these super tough teams.
If your team consistently performs well, holding off the tough teams and preventing them from scoring many goals, they would get a Tail Risk Score closer to 1. This is like having a portfolio that holds its value well, even when the market is doing poorly.
On the other hand, if your team struggles against the tough teams, letting them score lots of goals, they would get a Tail Risk Score closer to 10. This is like having a portfolio that loses a lot of its value when the market drops.
Let's say an average team usually allows the tough teams to score 2 goals per game. If your team also tends to allow 2 goals against the tough teams, they would get a score around 5, which is considered "neutral".
But if your team tends to allow 5 goals per game against the tough teams, they'd get a score of 8. That's because they're allowing 3 more goals than the average team, and each extra goal adds one point to their score.
So, in simple terms, the Tail Risk Score is like a grade on how well your team can handle the toughest opponents. The better they do, the lower the score. The harder they struggle, the higher the score.