Value-at-Risk

Posted on July 31, 2018 by Dr. David Edward Marcinko MBA MEd CMP™

Another Portfolio Risk Meter

 By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]

Value at Risk [VAR] is a technique used to estimate the probability of portfolio losses based on the statistical analysis of historic price trends and volatilities.

And, as a measure of investment portfolio peril, VAR has been gaining in popularity for several reasons.  

 

Gaining Popularity 

  1. First, physician investors, portfolio managers and their clients intuitively evaluate risk in monetary terms rather than standard deviation.  
  2. Second, in marketable portfolios, deviations of a given amount below the mean are less common than deviations above the mean for that same amount.

Unfortunately, measures such as standard deviation assume symmetrical risk. VAR measures the risk of loss at some probability level over a given period of time.  

Risk Example

For example, a doctor or investment manager may desire to know the portfolio’s risk over a one-day time period. The VAR can be reported as being within a desired quantile of a single day’s loss.  

Paranoia 

For paranoid physicians or other risk-intolerant investors, risk is about the odds of losing money, and VAR is based on that common-sense fact.  

By assuming doctor-investors care about the odds of a really big loss, VAR answers the question, “What is my worst-case scenario?” or “How much could I lose in a really bad month?” 

VAR Example 

In other words, assume a portfolio possesses a one-day 90% VAR of $5 million. This means that in any one of 10 days the portfolio’s value could be expected to decline by more than $5 million.  

Assessment 

Note that VAR is only useful for the liquid portions of a portfolio and cannot be used to assess risks in classes such as private equity, commodities or real assets. 

Conclusion 

And so, are you aware of VAR, and have you considered it when constructing your own investment portfolio? Why or why not? 

Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA – Editor and Publisher-in-Chief – is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com or Bio: http://www.stpub.com/pubs/authors/MARCINKO.htm 

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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