Value at Risk (VaR)

What is Value at Risk (VaR)?

Value at Risk (VaR) estimates the maximum expected loss of a portfolio over a given time horizon at a specified confidence level, assuming normal market conditions. A 1-day 95% VaR of $10,000 means there is a 5% chance of losing more than $10,000 in a single day. VaR is widely used by banks and regulators (Basel III mandates VaR reporting) and by risk managers for position sizing. Its key limitation is that it says nothing about the magnitude of losses beyond the confidence threshold: the 5% tail can contain catastrophic losses (this is why Expected Shortfall / CVaR is increasingly preferred). This calculator uses the parametric (variance-covariance) method assuming normally distributed returns.

Formula

Calculator

How to Use

1. 1
   Enter portfolio value: Total current market value of the portfolio.
2. 2
   Enter daily volatility: Daily standard deviation of portfolio returns (%). Annual vol ÷ √252 ≈ daily vol.
3. 3
   Choose confidence level: 95% is standard for risk management; 99% is used in banking regulation.
4. 4
   Set holding period: 1 day is standard for trading desks; 10 days is used for regulatory capital calculations.

Worked Example