Value at Risk (VaR) estimates potential loss under normal market conditions
Value at risk
Value at Risk (VaR) estimates potential loss under normal market conditions
Value at Risk (VaR) is a financial metric used to quantify the potential loss in an investment portfolio over a specified time period, given normal market conditions. It helps firms and regulators understand the amount of assets needed to cover possible losses. VaR is typically expressed as a probability (p) and a time horizon, indicating the maximum loss expected with a certain confidence level.
Example
If a portfolio has a one-day 5% VaR of $1 million, it means there is a 0.05 probability that the portfolio will lose $1 million or more in one day, assuming no trading occurs.
Understanding VaR helps financial institutions manage risk and ensure they have sufficient capital to cover potential losses.
Related concepts
Conditional VaR (CVaR) improves
CVaR improves risk assessment by measuring expected losses beyond the VaR threshold
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Deflated Sharpe ratio
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Greeks (finance)
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Net present value
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Educational content, not financial advice.
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