Forward-Looking Risk Analysis

Core Concepts

Parametric (Variance-Covariance) VaR

Assumes returns are normally distributed. For a single asset or portfolio in dollar terms (assuming zero expected return over short horizons):

VaR = W * z_alpha * sigma_p

where:

• W = portfolio value
• z_alpha = z-score for confidence level (1.645 for 95%, 2.326 for 99%)
• sigma_p = portfolio volatility over the relevant horizon

More generally, including expected return: