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The VaR calculation determines the maximum value that could be lost over a specific period of time. VaR is a statistical measure, quantifying the riskiness of Securities or Fund using Confidence Intervals.

Value at Risk (VaR) is a statistical calculation used for Funds, Stocks or Multi-Asset Portfolios. The VaR calculation can use, historical price data or an analysis of variance-covariance or via the testing of multiple scenarios, a Monte Carlo simulation. The objective of VaR is to determine the maximum value that a Stock or a Portfolio of Stocks could lose in a specified time period at a pre-defined confidence level. The result will be expressed as a maximum amount in the Currency that the Security or Portfolio is denominated, could lose in the time period. VaR is used as a statistical measure, quantifying the riskiness of Securities or Funds.

The parameters used in calculating VaR vary widely, largely depending on if the calculation is based on a Stock or Fund. The logic here is really looking at the volatility of the underlying Stock or Portfolio. Typically, a 95% Confidence Interval is used in the VaR calculation. The time period can vary from one day up to one month or longer. OK, if a one month 95% Confidence Interval is used in the VaR calculation, the VaR calculated is $1,000. The interpretation of the VaR result is that over the forthcoming month, there is only a 5% possibility that the losses in the Fund will exceed $1,000. If a particular Stock is more volatile compared to another Stock, then the time period used should be shorter. Diversified Stock portfolios could reasonably use a monthly VaR calculation.

The VaR calculation attempts to quantify possible investment losses over a specified time period at a Fund level or for an individual Stock. The application of the VaR calculation to qualify and mitigate the level of risk exposure or the potential for losses. VaR does have limitations. First, in making the calculation the method used, historical price data versus variance-covariance will give different results. Second, the VaR analysis indicates that in 5% of the losses the maximum loss is greater than X. VaR does not consider the potential size of the drawdown or left-hand skewness. Finally, in calculating individual VaR for Stocks within a portfolio, correlations are not considered, and thus the individual results are not additive.


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Warren William

Meet the author behind Smartest-Data. Warren William has a career in Finance and Investments extending over 35 years, both on the Buy Side and Sell Side. His most recent roles include, developing Institutional Risk Management Programs for managing Equity and Fixed Income Risk.  Prior to this Warren William work in Alternative Investments, in Investment Management and as a Buy Side Equity Analyst. Warren William brings a wealth of knowledge and expertise to the table, providing in-depth analysis and commentary on the latest trends in the Stock Markets. Contact information: or Telegram +393339034488

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