Conditional Value At Risk - CVaR

A A A

DEFINITION

A risk assessment technique often used to reduce the probability a portfolio will incur large losses. This is performed by assessing the likelihood (at a specific confidence level) that a specific loss will exceed the value at risk. Mathematically speaking, CVaR is derived by taking a weighted average between the value at risk and losses exceeding the value at risk.

This term is also known as "Mean Excess Loss", "Mean Shortfall" and "Tail VaR".

INVESTOPEDIA EXPLAINS

Conditional Value at Risk was created to be an extension of Value at Risk (VaR). The VaR model does allow managers to limit the likelihood of incurring losses caused by certain types of risk - but not all risks. The problem with relying solely on the VaR model is that the scope of risk assessed is limited, since the tail end of the distribution of loss is not typically assessed. Therefore, if losses are incurred, the amount of the losses will be substantial in value.


RELATED TERMS
  1. Risk Assessment

    The process of determining the likelihood that a specified negative event will ...
  2. Weighted Average

    An average in which each quantity to be averaged is assigned a weight. These ...
  3. Ex-Post Risk

    A type of risk measurement technique that uses historic returns to predict the ...
  4. Model Risk

    A type of risk that occurs when a financial model used to measure a firm's market ...
  5. Longitudinal Data

    The process of collecting sample observations from a larger population over ...
  6. Actuary

    A professional statistician working for an insurance company. They evaluate ...
  7. Value At Risk - VaR

    A statistical technique used to measure and quantify the level of financial ...
  8. Market Risk

    The possibility for an investor to experience losses due to factors that affect ...
  9. Risk

    The chance that an investment's actual return will be different than expected. ...
  10. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified period of time. ...
Related Articles
  1. Accelerating Returns With Continuous ...
    Bonds & Fixed Income

    Accelerating Returns With Continuous ...

  2. An Introduction To Value at Risk (VAR)
    Options & Futures

    An Introduction To Value at Risk (VAR)

  3. How To Convert Value At Risk To Different ...
    Active Trading Fundamentals

    How To Convert Value At Risk To Different ...

  4. Monte Carlo Simulation With GBM
    Fundamental Analysis

    Monte Carlo Simulation With GBM

  5. Herding Tendencies Among Analysts
    Investing Basics

    Herding Tendencies Among Analysts

  6. Understanding Leveraged Buyouts
    Fundamental Analysis

    Understanding Leveraged Buyouts

  7. How The Sarbanes-Oxley Era Affected ...
    Fundamental Analysis

    How The Sarbanes-Oxley Era Affected ...

  8. Where's The Market Headed Now?
    Fundamental Analysis

    Where's The Market Headed Now?

  9. Does Higher Risk Really Lead To Higher ...
    Active Trading

    Does Higher Risk Really Lead To Higher ...

  10. Invest Like Madoff - Without The Jail ...
    Options & Futures

    Invest Like Madoff - Without The Jail ...

comments powered by Disqus
Hot Definitions
  1. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
  2. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  3. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  4. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  5. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  6. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
Trading Center