Conditional value at risk
The average loss in the outcomes worse than the VaR, so it says how bad the tail is, which VaR does not. It is always at least as large as the VaR at the same level.
Where you will meet it
Conditional value at risk appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Set out the ways VaR has been extended
“Conditional VaR, also called expected shortfall or expected tail loss, is the average loss in outcomes worse than the VaR and is always at least as large as VaR at the same probability.”
- Explain the risk measures built into equity portfolio construction and how caps on them alter the portfolio
“Managers limit absolute risk, measured by portfolio volatility, value at risk or conditional VaR, and relative risk, measured by active risk against the benchmark.”
- Contrast how risk is defined when allocating on a goals-based, liability-relative or asset-only basis
“For asset-only allocation, risk is volatility of portfolio return, or tracking error against a policy benchmark, sometimes supplemented by downside measures such as conditional value at risk.”
- Interpret the metrics and charts that a strategy backtest reports
“Because strategy returns are often non-normal, it may also show skewness, excess kurtosis, downside deviation, VaR and conditional VaR, plus rolling performance across periods.”
Practise it
Practise conditional value at risk until it is automatic: questions that explain every wrong option.
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