What is 99% Value at Risk (VaR)?

Value at Risk (VaR) is a statistical measure used to assess the level of risk associated with a portfolio, indicating the maximum potential loss over a specified time period with a certain confidence level. When calculating the 99% VaR, we want to determine the worst expected loss under normal market conditions over a specific time frame, with a confidence level of 99%.

In a normal distribution, the 99% confidence interval corresponds to approximately 2.33 standard deviations below the mean. Therefore, the calculation for 99% VaR would be the mean return minus 2.33 times the standard deviation of the portfolio. This approach provides the threshold at which one would expect to not exceed 99% of the potential losses for the portfolio over the defined period.

This rationale allows risk managers and analysts to quantify potential losses in a way that is easily interpretable and can facilitate informed risk management and investment decisions.