What is CVaR and why is it important in finance?
An example of an AI chatbot conversation about understanding Conditional Value at Risk (CVaR).
What is CVaR and why is it important in finance?
CVaR, or Conditional Value at Risk, measures the expected loss in value of an investment in the worst-case scenarios. It's crucial for risk management.
How does CVaR differ from VaR?
While Value at Risk (VaR) estimates the maximum loss over a specified period, CVaR provides the average loss beyond that VaR threshold, giving a fuller picture of risk.
Can you give me an example of how CVaR is calculated?
Sure! If you have a portfolio with a 95% VaR of $1 million, CVaR would calculate the average loss of the worst 5% of outcomes, which might be $1.5 million.
What are the limitations of using CVaR?
CVaR assumes normal market conditions and may not account for extreme events or market anomalies, which can lead to underestimating risk.
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