Explain the term Value at Risk

Question

Explain the term Value at Risk.

Answer 1

VaR calculations frequently assume that returns are normally distributed in excess of the time horizon of interest. Inputs for a VaR computation will include details of the portfolio composition, parameters and the time horizon governing the distribution of the underlying. The latter set of parameters consists of average growth rate, standard deviations or volatilities and correlations. When the time horizon is short you can avoid the growth rate, as this will only have a small consequence on the last calculation.