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Value at Risk VaR

A statistical estimate of the worst loss expected over a set period at a chosen confidence level, under normal conditions.

Part of the Financial Health & Risk course · Lesson 19 of 20
Value at Riskmax likely loss at a confidence level
VaR estimates the worst expected loss over a horizon at a set confidence level.

What it is

Value at Risk (VaR) is a single number summarizing downside risk: the maximum loss a position or portfolio is expected to suffer over a fixed time horizon at a stated confidence level. A 1-day 95% VaR of $1M means there is roughly a 5% chance of losing more than $1M in a single day (and a 95% chance the loss stays at or below that). It is always tied to both a horizon (1 day, 10 days) and a confidence level (95%, 99%), so quoting a VaR number without those two parameters is meaningless.

Why it matters

VaR became the standard risk dashboard number for banks, funds, and regulators because it compresses messy return distributions into one comparable figure. The critical pitfall: VaR says nothing about how bad losses get beyond the cutoff — it ignores the size of tail events, so two portfolios with identical VaR can have wildly different worst-case behavior. It also tends to understate risk in crises (returns are fatter-tailed than the normal-distribution assumption), and ordinary VaR is not "subadditive," meaning a combined portfolio's VaR can exceed the sum of its parts, perversely penalizing diversification. Conditional VaR (Expected Shortfall) was created to fix the tail-blindness.

How it's calculated

Pick a horizon and confidence level, then estimate the loss distribution by one of three methods. Historical simulation re-prices the portfolio over past returns and reads off the relevant percentile; the parametric (variance-covariance) method assumes a normal distribution and scales the standard deviation by the matching z-score (about 1.65 for 95%, 2.33 for 99%); Monte Carlo simulates thousands of random scenarios and takes the percentile of simulated losses. VaR is the loss at that percentile of the distribution.

How Quintarthai uses it

Use VaR alongside the volatility and drawdown figures on a company's deep-analysis page to size how much a position could move against you, and read it together with maximum-drawdown and the Sharpe ratio. The Knowledge Base covers the complementary tail-risk and risk-adjusted-return measures it should be paired with.

Cross-border note. VaR is a universal statistic with no Canada-vs-US definitional difference, but the inputs change cross-border: a CAD-reporting investor holding US equities carries USD/CAD exchange-rate risk that should be folded into the return series, so a Canadian's VaR on a US holding is generally higher than the same position viewed in pure USD terms.

FAQ

Does a 95% 1-day VaR of $1M mean I can never lose more than $1M in a day?
No. It means that on roughly 95% of days losses stay at or under $1M, but on the remaining ~5% (about one trading day in twenty) losses exceed it — and VaR is silent on how far past $1M those bad days go.
Should I prefer VaR or Conditional VaR (Expected Shortfall) for my portfolio?
Use VaR as a quick comparable threshold, but lean on Conditional VaR for true downside planning. CVaR averages the losses in the worst tail beyond the VaR cutoff, so it captures crash severity that VaR ignores and behaves better when you combine positions.
Check your understanding
Your fund reports a 1-day 99% VaR of $2M. On a brutal day the portfolio actually loses $5M. Is this consistent with the VaR estimate?
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