Learn to Calculate Your Portfolio’s Value at Risk
Step by Step Guide to Risk Managing Your Portfolio with Historical VaR and Expected Shortfall
In this article, we are going to learn about risk management and how we can apply it to our equity portfolios. We are going to do that by learning about two risk management metrics, Value at Risk (VaR) and Expected Shortfall (ES) while also going through a step by step guide on how you can build a model to calculate these metrics specifically for your portfolio.
What is VaR?
The best way to explain VaR is to pose the question it helps answer:
What is the maximum loss I can expect my portfolio to have with a time horizon X and a certainty of Y%?
In other words, a one day 99% VaR of $100, means that my portfolio’s one-day maximum loss for 99% of the times, would be less than $100.
We can essentially calculate VaR from the probability distribution of the portfolio losses.
