A one-month VaR of 2% with a 3% confidence level indicates what?

A one-month Value at Risk (VaR) of 2% with a confidence level of 3% indicates the potential downside risk of an asset over the specified time frame. In this context, the VaR of 2% means that there is a 3% probability that the asset will decline in value by more than 2% over the next month. This is a key interpretation of VaR, which is designed to quantify the worst expected loss under normal market conditions over a set time period.

In practical terms, the assessment finds that in 3% of scenarios (the tail end of the probability distribution), losses could exceed 2%. This highlights a specific risk that investors need to be aware of, particularly in market environments that might exhibit volatility.

Understanding the confidence level is crucial; the higher the confidence level, the larger the range of loss values that could occur, meaning that the investor should be prepared for more significant declines that exceed the 2% mark in that 3% of occurrences.

This interpretation aligns with the core purpose of VaR, which is to provide a statistical measure of risk and to help investors gauge the likelihood of adverse outcomes within their portfolios.