Value at Risk (VaR 95%)

In short

Maximum expected loss over a period at 95% confidence level

VaR 95% says: 'On 95% of days, you won't lose more than X.' If your portfolio's daily VaR is $1,000, there's only a 5% chance of losing more than $1,000 in a single day.

VaR estimates the maximum potential loss over a given time period at a specific confidence level. A 1-day VaR of $1,000 at 95% confidence means a 5% probability of losing more than $1,000 in one day. Widely used by banks and risk managers.

Formula

VaR = Portfolio Value × z-score × σ × √t

Related concepts

CVaR (Conditional VaR) — While VaR says 'you won't lose more than X on 95% of days,' CVaR asks 'but on those worst 5% of days, how much do you lose on average?' If VaR is $1,000, CVaR might show the average loss in that worst 5% is actually $1,800 — a fuller picture of how bad the bad days really get.
Maximum Drawdown — If your portfolio hit $10,000 then fell to $6,000 before recovering, the max drawdown is 40%. It measures the worst experience a real investor would have endured.
Portfolio Volatility — Portfolio volatility measures how much your combined investments bounce around. Unlike individual stock volatility, it accounts for diversification — when some holdings go up while others go down, they partially cancel out, reducing overall portfolio risk.
Sharpe Ratio — Sharpe ratio measures how much return you get for every unit of risk you take. A Sharpe of 1.0 means for every 1% of risk, you earn 1% return above the risk-free rate. Higher is better.