1. What is Investment VaR?

Value at Risk (VaR) is a statistical measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day.

2. How Does the Calculator Work?

The calculator uses the Investment VaR formula:

Where:

• \( Value \) — The amount invested in USD
• \( Volatility \) — Standard deviation of investment returns (as decimal)
• \( Z-score \) — Number of standard deviations from the mean (typically 1.65 for 95% confidence or 2.33 for 99% confidence)

Explanation: The equation calculates the maximum expected loss over a specified time period at a given confidence level.

3. Importance of VaR Calculation

Details: VaR is widely used by portfolio managers to measure and control the level of risk exposure. It helps in understanding potential losses in normal market conditions.

4. Using the Calculator

Tips: Enter investment value in USD, volatility as decimal (e.g., 0.05 for 5%), and appropriate Z-score for your desired confidence level. All values must be valid (value > 0, volatility between 0-1).

5. Frequently Asked Questions (FAQ)

Q1: What are typical Z-score values?
A: Common Z-scores are 1.28 (90% confidence), 1.65 (95% confidence), and 2.33 (99% confidence).

Q2: How is volatility calculated?
A: Volatility is typically the standard deviation of historical returns, calculated as the square root of the variance of returns.

Q3: What time period does this VaR represent?
A: This calculates a single-period VaR. The time period depends on the volatility input (if daily volatility is used, the VaR is for one day).

Q4: What are limitations of VaR?
A: VaR doesn't estimate potential losses beyond the confidence level and assumes normal distribution of returns.

Q5: How can I annualize the VaR?
A: Multiply daily volatility by √252 (trading days) for annual volatility, then calculate VaR with the same formula.