How to Find a Portfolio’s Value at Risk
Quick and concise explanation and computation with code
Risk Management
There are a variety of metrics and tools that a portfolio manager can use to understand their exposure to risk, from economic indicators to Monte Carlo simulations. In this article, we will take a look at one of the most important metrics when analyzing an investment portfolio: Value at Risk (VaR). There are several assumptions that are made when computing a portfolio’s VaR. However, in practice, it is possible to relax these assumptions — consequently, the computations will be much more complex. It is very helpful to have software that can automatically compute VaR so as a portfolio manager you can use the information rather than worrying about computing it (though you should understand the process used and its implications). Therefore, herein we will also look at an example in Python to begin automating this process. In later articles, I aim to build out the software designed to automatically query and compute investment portfolio returns and standard deviations along with a more practical VaR…
Value at Risk (VaR)
What is meant by Value at Risk? VaR is stated in terms of a percentage, timeframe, and loss.
