What is one key advantage of using Value at Risk (VaR) for portfolio management?

One of the primary advantages of Value at Risk (VaR) in portfolio management is that it provides a clear and quantifiable measure of the maximum expected losses over a specified time period, given a certain confidence level. This metric helps portfolio managers and investors understand the potential downside risk of their investments in a straightforward manner. For instance, if a portfolio has a one-day VaR of $1 million at a 95% confidence level, it indicates that there is a 95% probability that the portfolio will not lose more than $1 million in a day.

This ability to quantify risk allows for better risk management and facilitates informed decision-making. Portfolio managers can use VaR to set risk limits and allocate capital more effectively, ensuring that their risk exposure aligns with their investment strategy and risk tolerance. Understanding maximum expected losses can also assist in communication with stakeholders about the inherent risks of the portfolio.

The other options do not accurately reflect the nature of VaR. For instance, while VaR provides insight into potential losses, it does not predict future market movements or guarantee returns. Additionally, it does not eliminate risks but rather quantifies them.