Concept

Value at risk

Summary
Value at risk (VaR) is a measure of the risk of loss of investment/Capital. 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. For example, if a portfolio of stocks has a one-day 95% VaR of 1million,thatmeansthatthereisa0.05probabilitythattheportfoliowillfallinvaluebymorethan1 million, that means that there is a 0.05 probability that the portfolio will fall in value by more than 1 million over a one-day period if there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day out of 20 days (because of 5% probability).
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