What is 'Value At Risk  VaR'
Value at risk (VaR) is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. This metric is most commonly used by investment and commercial banks to determine the extent and occurrence ratio of potential losses in their institutional portfolios. VaR calculations can be applied to specific positions or portfolios as a whole or to measure firmwide risk exposure.
BREAKING DOWN 'Value At Risk  VaR'
VaR modeling determines the potential for loss in the entity being assessed, as well as the probability of occurrence for the defined loss. VaR is measured by assessing the amount of potential loss, the probability of occurrence for the amount of loss and the time frame. For example, a financial firm may determine an asset has a 3% onemonth VaR of 2%, representing a 3% chance of the asset declining in value by 2% during the onemonth time frame. The conversion of the 3% chance of occurrence to a daily ratio places the odds of a 2% loss at one day per month.Applying VaR
Investment banks commonly apply VaR modeling to firmwide risk due to the potential for independent trading desks to expose the firm to highly correlated assets unintentionally. Employing a firmwide VaR assessment allows for the determination of the cumulative risks from aggregated positions held by different trading desks and departments within the institution. Using the data provided by VaR modeling, financial institutions can determine whether they have sufficient capital reserves in place to cover losses or whether higherthanacceptable risks require concentrated holdings to be reduced.
Problems With VaR Calculations
There is no standard protocol for the statistics used to determine asset, portfolio or firmwide risk. For example, statistics pulled arbitrarily from a period of low volatility may understate the potential for risk events to occur, as well as the potential magnitude. Risk may be further understated using normal distribution probabilities, which generally do not account for extreme or black swan events.
The assessment of potential loss represents the lowest amount of risk in a range of outcomes. For example, a VaR determination of 95% with 20% asset risk represents an expectation of losing at least 20% one of every 20 days on average. In this calculation, a loss of 50% still validates the risk assessment.
These problems were exposed in the financial crisis of 2008, as relatively benign VaR calculations understated the potential occurrence of risk events posed by portfolios of subprime mortgages. Risk magnitude was also underestimated, which resulted in extreme leverage ratios within subprime portfolios. As a result, the underestimations of occurrence and risk magnitude left institutions unable to cover billions of dollars in losses as subprime mortgage values collapsed.

Conditional Value At Risk  CVaR
A risk assessment technique often used to reduce the probability ... 
Risk Assessment
The process of determining the likelihood that a specified negative ... 
Market Risk
Market risk is the possibility of an investor experiencing losses ... 
Accepting Risk
Accepting risk occurs when a business acknowledges that the potential ... 
Country Risk
A collection of risks associated with investing in a foreign ... 
Risk Analysis
Risk analysis is the process of assessing the likelihood of an ...

Personal Finance
Backtesting ValueatRisk (VaR): The Basics
Learn how to test your VaR model for accuracy. 
Investing
An Introduction to Value at Risk (VAR)
Volatility is not the only way to measure risk. Learn about the "new science of risk management". 
Managing Wealth
Why Companies Need Risk Management
Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff? 
Investing
Low Vs. HighRisk Investments For Beginners
Understanding risk is key to better investing. 
Managing Wealth
How Risky Is Your Portfolio?
Find out how you could be subject to larger losses than you think. 
Investing
The Risks Associated with Common Investments
Investing inherently involves some risk. Here are some of the different types of investment risks. 
Financial Advisor
Asset Manager Ethics: Risk Management and Compliance
Managers should create a compliance and risk function that is integral to the investment function in order to plan for the increasingly more common market dislocations that occur in the global ... 
Investing
How To Manage Portfolio Risk
Follow these tips to successfully manage portfolio risk.

What does Value at Risk (VaR) say about the "tail" of the loss distribution?
Learn about value at risk and conditional value at risk and how both models interpret the tail ends of an investment portfolio's ... Read Answer >> 
How to calculate Value at Risk (VaR) in Excel
Learn what value at risk is, what it indicates about a portfolio and how to calculate the value at risk of a portfolio using ... Read Answer >> 
What is a "linear" exposure in Value at Risk (VaR) calculation?
Learn how the valueatrisk (VaR) calculation is used for portfolios with linear risk as opposed to nonlinear risk, and understand ... Read Answer >> 
What are some common measures of risk used in risk management?
Learn about common risk measures used in risk management and how to use common risk management techniques to assess the risk ... Read Answer >> 
What is RiskMetrics in Value at Risk (VaR)?
Learn about RiskMetrics and the value at risk (VaR) and how to calculate the VaR of an investment portfolio using some RiskMetrics ... Read Answer >> 
What is a "non linear" exposure in Value at Risk (VaR)?
Learn about nonlinearity and value at risk and what a nonlinear exposure is in the value at risk of a portfolio of nonlinear ... Read Answer >>