VAR attempts to assess the odds of losing money on a portfolio of, say, shares. There are three key inputs.
First, a confidence level nothing about the future is ever known with absolute certainty, but VAR tries to offer 95% or even 99% confidence. Next, there's a time period this could be a day, week or month. Finally, there's an estimated worst-case loss.
The actual calculation is complex and can be done several different ways. But the conclusion is typically similar, for example, "I am 99% confident that if I invest $1m now I will not lose more than 7% of it by the end of the day".
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sadly, there is always a small chance of a random 'black swan' event occurring (such as a stockmarket crash). If your VAR model fails to build that in, you could end up losing a lot more.
-
8 of the best lakeside properties for saleThe best lakeside properties – from a house on the southeastern shore of Loch Lomond, to a 15th-century hall overlooking a lake in King’s Lynn, Norfolk
-
Gold’s allure and why you should never 'pay a premium for graded coins'It is easy to become distracted by the beauty of gold, but remember why you buy it, says Dominic Frisby
