Conditional Value At Risk - CVaR

Brokerage firms, and those with large investment portfolios, like to measure the value at risk (VaR). It’s a statistical probability formula (don’t ask) done to cover a specific period of time for particular securities. It provides a worst case scenario if any of the securities perform poorly. But a conditional value at risk (CVaR) takes that worst case threshold and puts a number to it.

In other words, CVaR is the amount of expected losses that might occur beyond the VaR point. This might apply to riskier investments, such as recent Initial Public Offerings (IPO), options trading, and small-cap stocks. The smaller the CVaR the better, but investments with high CVaRs often have more upside potential.