Value-at-Risk (VaR)

An estimate of the loss a strategy is unlikely to exceed over a given horizon at a given confidence, computed from the standard deviation of returns scaled to the horizon and multiplied by a confidence factor (for example 1.65 for 95%). It understates risk under fat-tailed, skewed returns, and strategies whose VaR runs high struggle to survive because recovery from large drawdowns becomes statistically improbable.

First used in Lesson 2.6 · Position sizing and risk: how much, and how not to blow up — the lesson that makes this term real.