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Value at Risk (VaR) Formula:
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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.
The calculator uses the basic VaR formula:
Where:
Explanation: This simple version of VaR calculation multiplies the portfolio value by the standard deviation that corresponds to your desired confidence level.
Details: VaR is widely used by financial institutions to measure the market risk of their asset portfolios. It helps in risk management, regulatory compliance, and determining capital requirements.
Tips: Enter your portfolio value in USD and the standard deviation corresponding to your desired confidence level (e.g., 1.65 for 95% confidence, 2.33 for 99% confidence).
Q1: What confidence levels are commonly used?
A: Common confidence levels are 95% (1.65 SD) and 99% (2.33 SD), but other levels can be used depending on risk appetite.
Q2: What are the limitations of this simple VaR calculation?
A: This version doesn't account for time horizon, correlations between assets, or non-normal distributions. More complex models address these factors.
Q3: How often should VaR be calculated?
A: Typically calculated daily, but frequency depends on portfolio volatility and regulatory requirements.
Q4: What's the difference between VaR and expected shortfall?
A: VaR estimates the maximum loss at a confidence level, while expected shortfall estimates the average loss beyond the VaR threshold.
Q5: Can VaR be used for all types of risk?
A: VaR is primarily for market risk. Credit risk, operational risk, and other types require different measurement approaches.