Marginal VaR
What Is Marginal VaR?
Marginal VaR alludes to the extra amount of risk that another investment position adds to a firm or portfolio. Marginal VaR permits risk managers to study the effects of adding or deducting positions from an investment portfolio.
Since value at risk (VaR) is impacted by the correlation of investment positions, it isn't sufficient to consider an individual investment's VaR level in separation. Rather, it must be compared with the total portfolio to figure out which contribution it makes to the portfolio's VaR amount.
Grasping Marginal VaR
Value at risk (VaR) is a statistical technique that measures and evaluates the level of financial risk inside a firm, portfolio, or position throughout a specific time period. This measurement is generally normally utilized by investment and commercial banks to decide the degree and occurrence ratio of possible losses in their institutional portfolios. Risk managers use VaR to measure and control the level of risk exposure. One can apply VaR estimations to specific positions or whole portfolios or to measure far reaching risk exposure.
An individual investment might have a high VaR individually, yet in the event that it is negatively related to the portfolio, it might contribute a much lower amount of VaR to the portfolio than its individual VaR.
While measuring the effects of changing positions on portfolio risk, individual VARs are not adequate, in light of the fact that volatility measures the vulnerability in the return of an asset in disengagement. As part of a portfolio, what is important is the asset's contribution to portfolio risk. Marginal VaR disconnects added security-specific risk from adding an extra dollar of exposure.
Illustration of Marginal VaR
For instance, think about a portfolio with just two investments. Investment X has a value at risk of $500, and investment Y has a value at risk of $500. Contingent upon the correlation of investments X and Y, assembling the two investments as a portfolio would bring about a portfolio value at risk of just $750. This means that the marginal value at risk of adding either investment to the portfolio was $250.
Marginal VaR versus Incremental VaR
The incremental VaR is once in a while mistaken for the marginal VaR. Incremental VaR lets you know the exact amount of risk a position is adding or deducting from the whole portfolio, while marginal VaR is just an assessment of the change in total amount of risk. Incremental VaR is hence a more exact measurement, instead of marginal value at risk, which is an assessment utilizing for the most part a similar data. To ascertain the incremental value at risk, an investor has to know the portfolio's standard deviation, the portfolio's rate of return, and the asset being referred to's rate of return and portfolio share.
Highlights
- Marginal VaR figures the incremental change in aggregate risk to a firm or portfolio due to adding another investment.
- Value at risk (VaR) models the likelihood of a loss for a firm or portfolio in view of statistical techniques.
- Marginal VaR permits risk managers or investors to comprehend how new investments will modify their VaR picture.
