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Value at Risk

Value at risk (VaR) is a method of assessing risk that estimates the worst expected loss over an investment horizon at a given confidence level.

Value at risk uses the expected distribution of returns in order to estimate potential loss. We estimate value at risk from a portfolio’s expected return and standard deviation under the assumption that the portfolio’s returns are log-normally distributed.

Absolute value at risk estimates the dollar value of underperformance of an investor’s portfolio and is a function of the portfolio’s return and risk. Relative value at risk estimates the dollar value of underperformance to a benchmark and is a function of excess return and risk (tracking error).


Category:Understanding the Software -> Exposure to Loss

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