- Value at risk (VAR)
VAR attempts to assess the odds of losing money on a portfolio of say shares. There are three key inputs. First a confidence level – nothing about the future is ever known with absolute certainty, but VAR tries to offer 95% or even 99% confidence. Next there's a time period – this could be a day, week or month. Finally, there's an estimated worstcase loss. The actual calculation is complex and can be done several different ways. But the conclusion is typically similar, for example, "I am 99% confident that if I invest $1m now I will not lose more than 7% of it by the end of the day". Sadly, there is always a small chance of a random 'black swan' event occuring (such as a stockmarket crash). If your VAR model fails to build that in, you could end up losing a lot more.