Explain the concept of Value-at-Risk as a measure of market risk.

Explain the concept of Value-at-Risk as a measure of market risk. 

Ans. Value-at-risk is a single, summary, statistical measure of possible portfolio losses. Specifically, value at risk is a measure of losses due to “normal market movements.” Losses greater than the value at risk are suffered only with a specified small probability. Subject to the simplifying assumptions used in its calculation, value at risk aggregates all of the risks in a portfolio into a single number suitable for use in the board room, reporting to regulators, or disclosure in an annual report. Once one crosses the hurdle of using a statistical measure, the concept of value at risk is straightforward to understand. It is simply a way to describe the magnitude of the likely losses on the portfolio.