Describe the concept of 'tail risk.'

Tail risk refers to the risk of extreme market movements that occur in the far ends of a probability distribution, specifically in the "tails" of the distribution curve. This type of risk is important because it encompasses events that have a low probability of occurring but can have significant and devastating impacts on investments or the financial system when they do occur. These extreme events are often unpredictable and can lead to large losses, highlighting the inadequacy of models that only focus on average market movements.

The focus on tail risk is particularly salient during periods of market stress or crisis, where typical risk assessments may overlook the potential for drastic downward movements. By recognizing and preparing for tail risks, investors can better position themselves to mitigate potential losses from these rare, high-impact events.