Value at Risk VAR Calculator Australia

Value at Risk (VaR) Calculation:

\[ VaR = \text{Portfolio Value} \times \text{Volatility} \times \text{Z-Score} \times \sqrt{\text{Time Horizon}} \]

Portfolio Value (AUD):

AUD

Volatility (%):

Confidence Level:

Time Horizon (days):

days

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 portfolio over a specific time frame. 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 parametric VaR formula:

\[ VaR = \text{Portfolio Value} \times \text{Volatility} \times \text{Z-Score} \times \sqrt{\text{Time Horizon}} \]

Where:

Portfolio Value — Total value of the investment portfolio in AUD
Volatility — Standard deviation of portfolio returns (as percentage)
Z-Score — Number of standard deviations corresponding to confidence level
Time Horizon — Number of days for risk assessment

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

3. Importance of VaR Calculation

Details: VaR is widely used by financial institutions to measure and control the level of risk exposure. It helps in capital allocation, risk management, and regulatory compliance.

4. Using the Calculator

Tips: Enter portfolio value in AUD, volatility as percentage (e.g., 2.5 for 2.5%), select confidence level, and specify time horizon in days.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between parametric and historical VaR?
A: Parametric VaR assumes normal distribution of returns, while historical VaR uses actual historical return data without distribution assumptions.

Q2: What confidence level should I use?
A: 95% is common for daily risk assessment, while 99% is used for more conservative estimates or regulatory reporting.

Q3: How accurate is this VaR calculation?
A: Accuracy depends on quality of volatility estimate and validity of normal distribution assumption. It may underestimate risk during market crises.

Q4: What are the limitations of VaR?
A: VaR doesn't predict maximum possible loss and can underestimate tail risk. It should be used with other risk measures like Expected Shortfall.

Q5: How often should VaR be calculated?
A: For active trading portfolios, daily calculation is common. For long-term investors, weekly or monthly may be sufficient.