Value At Risk (VaR)

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Definition

The VaR calculates the potential loss of an investment with a given time frame and confidence level.

For example, if a security has a 5% Daily VaR (All) of 4%:

There is 95% confidence that the security will not have a larger loss than 4% in one day. Since this metric says (All) we are calculating this using all available price history for the security.

In another example, if a security has a Monthly VaR 1% (3Y Lookback) of 15%:

There is 99% confidence that the security will not have a larger loss than 15% in one month. This is calculated using the past 3 years of historical prices.

Keep in mind that VaR does not give you any information about the magnitude of the potential loss in excess of the VaR. For a calculation that give you this information you can view Expected Shortfall.

Formula

VaR is calculated by taking the differences between each number in the price history and the mean, squaring the differences and dividing them by the number of values in the set.

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