Value at Risk (VaR) Calculator

Formula

The formula to calculate Value at Risk (VaR) is:

\[ \text{VaR} = [\text{EWR} - (Z \times \text{STD})] \times \text{PV} \]

Where:

$\text{VaR}$ is the Value at Risk (dollars).
$\text{EWR}$ is the Expected Weighted Return (dollars).
$\text{Z}$ is the Z Score (dimensionless).
$\text{STD}$ is the Standard Deviation (dollars).
$\text{PV}$ is the Portfolio Value (dollars).

What is Value at Risk (VaR)?

Value at Risk (VaR) is a statistical measure used to assess the risk of an investment portfolio. It estimates the maximum potential loss that a portfolio might experience over a specified time period with a given confidence level. For instance, a 1-day VaR of $1,000 at a 95% confidence level means there is a 5% chance the portfolio will lose more than $1,000 in one day. VaR helps investors and risk managers understand the potential downside of their investments and manage risk effectively.

Example Calculation

Consider an example where:

Expected Weighted Return (EWR): $5,000
Z Score (Z): 1.96 (for a 95% confidence level)
Standard Deviation (STD): $200
Portfolio Value (PV): $1,000,000

Using the formula to calculate the Value at Risk:

\[ \text{VaR} = [5000 - (1.96 \times 200)] \times 1000000 = [5000 - 392] \times 1000000 = 4608 \times 1000000 = 4,608,000 \]

This means the Value at Risk for this example is $4,608,000.