Value at Risk

Definition

The Value at Risk (VaR) quantifies the maximum potential loss of a portfolio at a specified confidence level. This VaR value is computed using the Variance-Covariance method at 95% confidence level. Other possible methods are historical method and the Monte Carlo method.

Formula

$\text{VaR} = -\mu_p + z \cdot \sigma_p$

where $\mu_p$ is the expected portfolio return, $\sigma_p$ is the portfolio standard deviation, and $z$ is the z-score corresponding to the desired confidence level.