Financial Education

The risk management concept of Value at Risk (VaR) has met with wide acceptance and has spawned a number of extensions and supplements to the original concept. These include cash flow at risk, earnings at risk and tail value at risk.

Cash flow at risk and earnings at risk measure the risk to either cash flow or earnings (rather than market value) for a given risk factor. It can be useful when assessing assets that generate cash flow or earnings but are difficult to value. It can also be used as a sensitivity test for valuation models.

Tail value at risk adjusts VaR to not only express the minimum loss but also the expected loss when extreme outcomes occur. It is expressed as VaR plus the expected loss in excess of VaR. For example, the tail value at risk for a 5% VaR would be the average of the worst 5% of outcomes.

For more information, see all articles on: Governance, Portfolio Management, Risk Management

See also:

Extensions to Classical Bond Immunization Theory

Forming an Investment Risk Objective

Enterprise Risk Management

Using Derivatives to Hedge Different Types of Credit Risk

Investment Objectives