Value at Risk (VaR) is best described as...

Value at Risk (VaR) is best described as...

• A. Expected return
• B. The maximum expected loss over a given time horizon at a specified confidence level
• C. Median loss
• D. Worst-case loss without probability

Answer: (B)

Value at Risk measures the downside risk as a loss threshold tied to a specific time horizon and confidence level. It tells you the maximum loss you should expect to exceed only with a small probability. In practice, a one-day VaR at 95% confidence means there is only a 5% chance that losses will exceed that threshold on any given day. This distinguishes VaR from metrics like expected return or median loss and from a true worst-case loss. It uses a probability to define the limit, not just the single worst outcome, and it applies to a defined horizon.

Value at Risk measures the downside risk as a loss threshold tied to a specific time horizon and confidence level. It tells you the maximum loss you should expect to exceed only with a small probability. In practice, a one-day VaR at 95% confidence means there is only a 5% chance that losses will exceed that threshold on any given day. This distinguishes VaR from metrics like expected return or median loss and from a true worst-case loss. It uses a probability to define the limit, not just the single worst outcome, and it applies to a defined horizon.