Value At Risk - VaR


DEFINITION of 'Value At Risk - VaR'

A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. Value at risk is used by risk managers in order to measure and control the level of risk which the firm undertakes. The risk manager's job is to ensure that risks are not taken beyond the level at which the firm can absorb the losses of a probable worst outcome.


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BREAKING DOWN 'Value At Risk - VaR'

Value at Risk is measured in three variables: the amount of potential loss, the probability of that amount of loss, and the time frame. For example, a financial firm may determine that it has a 5% one month value at risk of $100 million. This means that there is a 5% chance that the firm could lose more than $100 million in any given month. Therefore, a $100 million loss should be expected to occur once every 20 months.

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  1. What risks do I face when investing in the insurance sector?

    Like all equity investments, insurance companies present investors with market risk. Insurance companies, like banks, also ... Read Full Answer >>
  2. Should you calculate Value at Risk (VaR) for counterparty credit risk?

    Value at risk (VaR) calculations may be helpful for risk management when trading credit default swaps and other derivatives ... Read Full Answer >>
  3. What do regulators think of Value at Risk (VaR)?

    Most regulators across the world consider value at risk, or VaR, to be an effective internal model of financial risk, and ... Read Full Answer >>
  4. What is the minimum number of simulations that should be run in Monte Carlo Value ...

    The minimum number of simulations that should be run for a reasonably accurate value at risk (VaR) assessment is generally ... Read Full Answer >>
  5. What is stress testing in Value at Risk (VaR)?

    Stress testing involves running simulations under crises for which a model was not inherently designed to adjust. The purpose ... Read Full Answer >>
  6. What does Value at Risk (VaR) have to do with maximization of shareholder wealth?

    By enabling investors to estimate with high probability the worst-case and best-case scenarios for the performance of a given ... Read Full Answer >>
  7. What is a "linear" exposure in Value at Risk (VaR) calculation?

    A linear exposure in the value-at-risk, or VaR, calculation is represented by positions in stocks, bonds, commodities or ... Read Full Answer >>
  8. What is a "non linear" exposure in Value at Risk (VaR)?

    The value at risk (VaR) is a statistical risk management technique that determines the amount of financial risk associated ... Read Full Answer >>
  9. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... Read Full Answer >>
  10. What is backtesting in Value at Risk (VaR)?

    The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >>
  11. What's the difference between a confidence level and a confidence interval in Value ...

    The value at risk (VaR) uses both the confidence level and confidence interval. A risk manager uses the VaR to monitor and ... Read Full Answer >>
  12. What does Value at Risk (VaR) say about the "tail" of the loss distribution?

    The value at risk (VaR) is a statistical measure that assesses, with a degree of confidence, the financial risk associated ... Read Full Answer >>
  13. What is RiskMetrics in Value at Risk (VaR)?

    RiskMetrics is a methodology that contains techniques and data sets used to calculate the value at risk (VaR) of a portfolio ... Read Full Answer >>
  14. What are some common measures of risk used in risk management?

    Risk management is a crucial process used to make investment decisions. The process involves identifying the amount of risk ... Read Full Answer >>
  15. What's the difference between EaR, Value at Risk (VaR), and EVE?

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