Value at Risk (VaR) is a measure of the risk of a portfolio. It is closely related to its volatility.

The Value at Risk is the largest amount that a portfolio risks losing with a given level of confidence.

If a portfolio has a VaR of *x* with 99% confidence over one week, this means that there is only a 1% chance that a portfolio will lose more than *x* in the next week.

VaR is particularly useful for managing complex combinations of risk over short time periods. It is therefore often used by banks and other financial institutions to measure the risk of their trading positions. It allows them measure the combined risk of a large number of different positions that may be held at any one time. It does this in a form that can be related to their ability to absorb that risk

Value at risk is usually used as a measure of short term risk: often as little as a day or a week. It is difficult to apply to longer term risk as the probability distributions of the future value of securities deviate further from the normal distribution. The chances of very large movements in the market (such as a crash) are often much larger than would be the case with a normal distribution: the actual distribution is fat tailed than the normal distribution. This makes the calculation of an accurate VaR harder