Measuring Risk

There are a number of techniques that can be used to measure risk. One of the most widely used is value at risk. Value at risk (VAR) is a risk management methodology which is used to determine the worst case loss scenario given a number of assumptions.

Measuring Value at Risk

Value at Risk can be calculated using a number of methodologies. Each technique uses specific assumptions about return performance. Historical data is one of the more popular techniques but it assumes that history will repeat itself.   Another option is to analyze the distribution of the returns and use variances in and co-variances across these risks. A third methodology is to use a simulation which generates a data series based on random sampling.

Measuring risk can be a very sophisticated endeavor. The underlying theme which can make the process simple is that an investor should risk less than they willing to generate in income and avoid ruin.