Entropic Value at Risk (EVaR)

Entropic Value at Risk (EVaR) is a risk measure that extends the concept of Value at Risk (VaR) by incorporating the principles of entropy and uncertainty. EVaR provides a more comprehensive risk assessment by accounting for all potential outcomes, including extreme tail events, and reflects a decision-maker’s risk aversion. Unlike traditional VaR, which focuses only on the most likely losses, EVaR offers a broader perspective on potential risks. EVaR is particularly valuable in scenarios with high uncertainty or where extreme outcomes could significantly impact the financial position of an investor or institution.

Example

A hedge fund uses EVaR to assess the potential risks of its portfolio, factoring in both common and rare extreme events that could affect performance.