Introduction to VaR

Up to now, we have several ways to evaluate risk for an individual stock or a portfolio, such as variance, standard deviation of returns to measure the total risk, or beta to measure the market risk of a portfolio or individual stocks. On the other hand, many CEOs prefer a simple measure called Value at Risk (VaR), which has the simple definition given here:

"The maximum loss with a confidence level over a predetermined period."

From the preceding definition, it has three explicit factors plus one implied one. The implied factor or variable is our current position, or the value of our current portfolio or individual stock(s). The preceding statement offers the maximum possible loss in the future and this is the first factor. The second one is over a specific time period. Those two factors are quite common. However, the last factor is quite unique: with a confidence level or probability. Here are a few examples:

• Example #1: On February 7, 2017, we own 300 shares...