Value at risk

VaR must specify the loss or value measure, horizon, confidence level and modelling assumptions. A 95% loss VaR is a threshold exceeded in roughly 5% of modelled outcomes; it is not the largest possible loss or a prediction that the threshold will occur. For project appraisal, normal-distribution calculations may express downside variation from expected NPV or a lower-tail NPV, which are different quantities. Tail shape, dependence and parameter estimates affect reliability. A normal or square-root-of-time approximation requires assumptions that may fail, especially in stressed markets.