Var Calculation Calculator

VaR Formula:

\[ VaR = Norm.Inv(Confidence, Mean, SD) \times \sqrt{t} \times Value \]

Confidence Level (decimal):

Mean Return (decimal):

Standard Deviation (decimal):

Time Period (t):

Portfolio Value (USD):

USD

Value at Risk (VaR):

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1. What is Value at Risk (VaR)?

Value at Risk (VaR) is a statistical measure that quantifies the level of financial risk within a firm, portfolio, or position over a specific time frame. It estimates how much a set of investments might lose, given normal market conditions, in a set time period with a given confidence level.

2. How Does the Calculator Work?

The calculator uses the parametric VaR formula:

\[ VaR = Norm.Inv(Confidence, Mean, SD) \times \sqrt{t} \times Value \]

Where:

\( Norm.Inv \) — Inverse normal distribution function
\( Confidence \) — Confidence level (e.g., 0.95 for 95%)
\( Mean \) — Expected return of the portfolio
\( SD \) — Standard deviation of returns (volatility)
\( t \) — Time horizon
\( Value \) — Portfolio value in USD

Explanation: The formula assumes normal distribution of returns and calculates the worst expected loss over a given time period under normal market conditions.

3. Importance of VaR Calculation

Details: VaR is widely used by financial institutions to measure the market risk of their asset portfolios, determine capital requirements, and assess risk-adjusted performance.

4. Using the Calculator

Tips: Enter confidence level as decimal (0.95 for 95%), mean return as decimal (0.05 for 5%), standard deviation as decimal, time period in years (1 for one year), and portfolio value in USD.

5. Frequently Asked Questions (FAQ)

Q1: What are common confidence levels used in VaR?
A: Common confidence levels are 95% (1.645 SD) and 99% (2.326 SD) for normal distributions.

Q2: What are the limitations of parametric VaR?
A: It assumes normal distribution of returns, which may not capture tail risks. Historical or Monte Carlo VaR may be better for non-normal distributions.

Q3: How does time horizon affect VaR?
A: VaR increases with the square root of time due to the assumption of independent, identically distributed returns.

Q4: What's the difference between absolute and relative VaR?
A: Absolute VaR measures loss from current value, while relative VaR measures loss relative to expected value (subtracts mean return).

Q5: How often should VaR be calculated?
A: Typically calculated daily for active trading portfolios, but frequency depends on portfolio volatility and risk management needs.