Incremental Value at Risk

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Incremental value at risk: or iVaR, is a measure of risk attribution. It tells us how much risk a position or sub-portfolio is adding to a portfolio. It can be positive or negative. If the iVaR of a position is positive then increasing the size of the position slightly will increase the value at risk of the portfolio. Likewise, if the iVaR is negative then increasing the size of the position slightly will lower the value at risk of the portfolio.

Calculating Incremental Value at Risk: Incremental value at risk just looks at an investment individually and analyses how much the addition of that single investment to the total portfolio might cause the portfolio to rise or fall in value. It is a precise measurement, as opposed to marginal value at risk, which is an estimation of the same information. To calculate the incremental value at risk, an investor needs to know the portfolio’s standard deviation, the portfolio’s rate of return and the asset in question’s rate of return and portfolio share.

The incremental VaR is sometimes confused with the marginal VaR; incremental VaR tells you the precise amount of risk a position is adding or subtracting from the whole portfolio, while marginal VaR is just an estimation of the amount of risk.

Key Take away:

  1. Incremental value at risk is a measure of how much risk a particular position is adding to a portfolio.
  2. It’s a risk assessment used by investors who are thinking of making a change to their holdings, by either adding or removing a particular position.
  3. Incremental value at risk is a variation on the value at risk measurement (VaR), which looks at the worst-case scenario for a portfolio as a whole in a specific period of time.

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