Conditional VaR (CVaR) improves

Ever worried about losing more than you planned in a risky investment?

Imagine you're playing a game where you can win or lose money based on dice rolls. You want to know how much you might lose in a bad roll, but you're not worried about the worst-case scenario.

You're looking for a safety net that tells you the worst-case loss, not just the chance of losing a certain amount. This net helps you understand the true risk of losing more than you expect.

Example

If your game has a 5% chance of losing $1 million, VaR tells you that's the worst loss you should expect 95% of the time.

Remember this

VaR gives you a clearer picture of potential losses, beyond just the odds of losing a certain amount.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

Related concepts

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Value at risk

Value at Risk (VaR) estimates potential loss under normal market conditions

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Sortino ratio

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Bias ratio

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Vega

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Educational content, not financial advice.

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