VaR
InvestingDefinition
Value at Risk. Statistical estimate of the maximum loss an investment portfolio is expected to suffer over a given time period at a given confidence level. "1-day 95% VaR of $1M" means the portfolio is expected to lose more than $1M on no more than 1 in 20 trading days.
Useful as a normalization metric across portfolios but famously underestimates tail risk (assumes normal distribution). The 2008 crisis demonstrated that VaR-based risk management failed in fat-tail environments.
Useful as a normalization metric across portfolios but famously underestimates tail risk (assumes normal distribution). The 2008 crisis demonstrated that VaR-based risk management failed in fat-tail environments.