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Quantitative Equity Portfolio Management by Daehwan Kim, Ludwig B Chincarini

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APPENDIX 5BOn Outliers

An outlier is an observation in a distribution that is very extreme and has an extremely small probability of occurring. An outlier is something that looks very inconsistent with the rest of the data. These outliers could arise as a result of data errors by the data supplier, they could be due to an incorrect distributional assumption of the underlying data, or they could be a novel phenomenon. If they arise from data errors, it is a good idea for the QEPM to remove these data entirely. If they arise from an incorrect distributional assumption, this is usually difficult to determine; thus the QEPM may wish to truncate the values to reasonable values so as to not distort the portfolio creation process (e.g., to 3 or -3). ...

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