Value at Risk : How Much Can I Lose by this Time Next Year?

An individual investor typically assesses the risk of his portfolio by means of its asset mix - the proportion of stocks to bonds - or by the type of stocks it contains, or sometimes by more sophisticated measures such as its volatility. This article demonstrates an alternative measure of risk: How much can I realistically lose by this time next year? This approach uses a variation of Value at Risk, or VaR. VaR was designed to enable large financial institutions with significant resources to measure their risk exposure. Yet even individual investors with small portfolios can use the same general approach to gauge their own risk exposure. Though no one should rely exclusively on this or any other single risk measure, the approach in this article can help investors reach their comfort risk level - which is, after all, a major part of financial planning. It helps to be able to answer the question, quot;What's the most I can realistically lose by this time next year?quot