Incremental Value At Risk

When you make an investment, you turn cash into an asset...shares of stock, a bond, a bag of magic beans, whatever. You’ve also added risk. You are hoping the asset goes up in value (that’s the point of buying it). But it also has a chance of losing value. Hence, the risk.

Incremental value at risk represents a way to measure this dynamic. The term refers to the gain or loss in risk a portfolio experiences when you buy or sell an investment.

If you’re a fancy portfolio manager, you would call it iVaR, and you would use high-octane equations to compute a quantitative value for the figure. A position with a positive value of iVaR will incrementally add risk as you put more money into that investment. A negative value means you incrementally decrease risk as you add to the position.