Value at Risk (VaR)

Value at Risk (VaR) is a risk management tool that estimates the maximum potential loss of a portfolio or investment over a specific time period with a given confidence level. VaR is commonly used to assess market risk and helps investors or institutions understand the potential downside of their positions. It is typically expressed as a dollar amount or percentage and assumes normal market conditions.

Example

A portfolio with a one-day VaR of $1 million at a 95% confidence level means that there is a 95% probability that the portfolio will not lose more than $1 million in one day under normal market conditions.