Value At Risk Calculator

Pros and Cons of Value at Risk (VaR)

+ Pros

On the pros side, the VaR measurement is widely used by many financial industry professionals and, as a measurement, it is easy to understand. By any means, VaR offers clarity.

- Cons

VaR can tell us things like with 99% certainty, losses will not exceed X, however, it can tell you nothing about what happens beyond that confidence level (losses can be much larger).

There are a few pros and cons to using Value at Risk calculation in risk measurement. The model is developed to work this way because the probabilities in VaR are based on a normal distribution of returns. But, we need to have in mind that financial markets are known to have extreme outlier events on a regular basis— far more than a would predict.

Finally, the VaR calculation requires several statistical measurements such as variance, covariance, and standard deviation. With a two-asset simple portfolio, this is relatively straightforward, but the complexity increases exponentially for a highly diversified portfolio with many instruments.