Value at Risk

What is Value at Risk (VaR)?

Value at risk is a statistical measure of the risk of losing money on an investment. It is used by investors to determine how much they are willing to lose on an investment before selling it.

Value at risk is calculated using historical data and a mathematical model that predicts how much an investment will lose over a given period of time. The model takes into account the variability of the investment’s return and the investor’s risk tolerance.

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A widely used measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading) is the given probability level.


Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses.

For a given portfolio, time horizon, and probability p, the p VaR can be defined informally as the maximum possible loss during that time after excluding all worse outcomes whose combined probability is at most p. This assumes mark-to-market pricing, and no trading in the portfolio.

Value at Risk explained

Value at risk is a useful tool for managing risk, but it is important to remember that it is only a prediction. There is always the possibility that an investment will lose more money than the value at risk model predicts.

For this reason, it is important to use value at risk in conjunction with other risk management tools. By doing so, investors can help to protect themselves from the potential for large losses.