What is the concept of Value at Risk (VaR) and how does it relate to historical simulation?

Question

Accepted Answer

VaR is a measure of potential loss in value of a portfolio over a specified time horizon at a given confidence level.

VaR quantifies the maximum potential loss in value of a portfolio over a specified time horizon at a given confidence level.
Historical simulation is a method of calculating VaR by using historical data to simulate potential future outcomes.
VaR helps in assessing and managing market risk by providing an estimate of potential losses.
It is commonly used in financial institutions to set risk limits and make informed investment decisions.
For example, if a portfolio has a 5% one-day VaR of $1 million at a 95% confidence level, it means there is a 5% chance of losing $1 million or more in one day with 95% confidence.

Popular interview questions of Market Risk Analyst