Value at Risk (VaR).
A definition, in plain English — with the books that teach it.
What it means
Value at Risk (VaR) estimates the maximum loss a portfolio is expected to incur over a given time period at a specified confidence level under normal market conditions. A common expression is "1-day 99% VaR of $1 million" — meaning there is a 1% chance of losing more than $1 million in a single day. VaR is widely used by banks and fund managers for regulatory capital requirements, but critics note it understates tail risk and can create false precision around rare, catastrophic events.
Example
A bank's trading desk reports a 1-day 95% VaR of $5 million. This means that under normal conditions, losses should not exceed $5 million on 95% of trading days — but on roughly 1 in 20 days, losses could exceed that threshold by an unpredictable amount.
