What does "value-at-risk" (VaR) measure in investment management?

Value-at-risk (VaR) is a statistical measure used in investment management to assess the potential loss that an investment portfolio could face over a specific time period, given a certain confidence level. This measure provides insight into the risk associated with the portfolio by estimating the maximum expected loss under normal market conditions. For instance, if a portfolio has a VaR of $1 million at a 95% confidence level over a 1-day period, it means there is a 5% chance that the portfolio could lose more than $1 million in one day.

Understanding VaR helps investors manage risk and make informed decisions about portfolio adjustments, considering their risk tolerance. It is a crucial tool for risk management, allowing investors to quantify the potential downside they might face, enhancing their ability to strategize for both short-term volatility and long-term investments.