Market risk is the potential for a loss in value of an investment portfolio when prices drop due to sources of systematic risk, or changes in risk factors that affect the entire market or market segments.
Market risk is commonly measured and communicated as value-at-risk (VaR), or the amount of a portfolio that is at risk of loss over a specified timeframe. For example, for a one-month 5% VaR of $1 million in a portfolio, there is a 1 in 20 chance of losing $1 million over a month’s timeframe. Determining a portfolio’s VaR is a complex process. Many financial risk managers employ sophisticated models to analyze, rank, and decide on appropriate strategies for managing market risk.
Effective techniques for managing market risk include:
varbacktest: Value-at-risk (VaR) backtesting - Function
portalpha: Calculate risk-adjusted alphas and returns - Function
Portfolio: Mean-variance efficient frontier - Function
Portfolio: Portfolio object for mean-variance portfolio optimization and analysis - Object