Glossary

Value-at-Risk (VaR) is a widely-used risk management metric that estimates the maximum potential loss an investment portfolio could experience over a specified time period, given a certain level of probability. 📊

It helps investors and portfolio managers understand the potential downside risk of their investments and make informed decisions about asset allocation, risk management, and capital requirements.

Example: Suppose a portfolio has a 1-day VaR of £10,000 at a 95% confidence level. This means there is a 95% chance that the portfolio's losses will not exceed £10,000 in a single day.

Fun fact: Although VaR has become a standard measure for assessing portfolio risk, it has its critics. 😮 One major criticism is that VaR only provides a single number representing the worst-case loss within a certain probability, but it doesn't give any information about the potential losses beyond that threshold, which could be much higher. This limitation was evident during the 2008 financial crisis when some financial institutions experienced losses far exceeding their calculated VaR.