1. What is Value at Risk (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 VaR Calculator Work?

The calculator uses the standard VaR equation:

Where:

• Portfolio Value — Current value of the investment portfolio in USD
• Z — Z-score corresponding to the desired confidence level (1.96 for 95% confidence)
• Volatility — Standard deviation of portfolio returns (as a decimal)
• Time — Time horizon for risk assessment in years

Explanation: The equation accounts for portfolio size, risk level (z-score), volatility, and time horizon to estimate potential loss.

3. Importance of VaR Calculation

Details: VaR is crucial for risk management, helping investors understand potential losses, set risk limits, and meet regulatory requirements.

4. Using the Calculator

Tips: Enter portfolio value in USD, z-score (1.96 for 95% confidence, 2.33 for 99%), volatility as decimal (0.05 for 5%), and time in years. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What are common confidence levels for VaR?
A: 95% (z=1.645) and 99% (z=2.326) are most common, but other levels can be used.

Q2: How do I convert daily volatility to annual?
A: Multiply daily volatility by √252 (trading days in a year). For monthly, multiply by √12.

Q3: What are limitations of VaR?
A: VaR doesn't predict maximum loss and can underestimate risk during market crises.

Q4: How often should VaR be calculated?
A: Typically daily for active portfolios, but frequency depends on portfolio turnover and strategy.

Q5: Can VaR be used for all asset types?
A: While widely applicable, VaR may be less reliable for assets with non-normal return distributions.