Title: What's the difference between a confidence level and a confidence interval in Value at Risk (VaR)?
Headings: Confidence Level and Confidence Interval in Value at Risk (VaR)
Confidence Level and Confidence Interval in Value at Risk (VaR)
Key Takeaways
Value at Risk (VaR)
Confidence Level
Confidence Interval
VaR Portfolio Comparison

Content: While confidence level and confidence interval are interconnected and can be part of a risk assessment, they are not exactly alike. Key Takeaways
Value at risk (VaR) is a statistic that quantifies the amount of potential loss that could occur within an investment, a portfolio of investments, or a firm over a specified time period. A VaR assessment helps financial institutions identify high-risk investments and determine the cash reserves they will need to cover potential portfolio losses. The VaR uses both the confidence interval and confidence level to build a risk assessment model. A confidence interval is two set values that probability indicates a parameter will fall between. The confidence level reflects the level of probability (expressed as a percentage) that the confidence interval would contain the population parameter. Value at Risk (VaR)
VaR is a useful statistic because it helps financial institutions determine the level of cash reserves they need to cover potential portfolio losses. Risk managers traditionally use volatility as a statistical measurement for risk. However, investment and commercial banks frequently use VaR to determine cumulative risks from highly correlated positions held by different departments within the institution. The VaR analysis helps the institution estimate with a high confidence level the maximum amount or percentage that could potentially be lost on an investment over a given time.