Marginal VaR

What it means

The change in portfolio VaR from a small increase in one position — the position’s contribution to total risk at the margin.

The exam angle

Component VaR sums to total VaR and is what risk budgeting allocates. Standalone VaR does not sum, and using it overstates the whole.

Where it appears in the syllabus

• Risk & Investment ManagementFRM Part II · exam weight 15% · Factor theory, risk budgeting, attribution, hedge funds, illiquid assets.
• Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.

See it worked through

• Value at Risk: the square-root-of-time ruleScale a one-day VaR to ten days with a worked example, and see where the rule breaks.

There is also a short video: watch it on YouTube.

Related terms

• Liquidity-adjusted VaRVaR extended to include the cost of closing the position — the bid–ask spread and the market impact of exiting at size.
• Arbitrage pricing theoryA model deriving expected returns from exposures to multiple systematic factors, assuming no arbitrage rather than a…
• Factor investingBuilding portfolios around systematic return drivers — value, size, momentum, quality, low volatility — rather than…
• Hedge fund replicationReproducing hedge fund returns using liquid instruments and factor exposures, rather than by paying for the funds…
• Multifactor modelA model explaining returns by exposure to several systematic factors rather than to the market alone.
• Performance attributionDecomposing a portfolio’s return relative to its benchmark into the decisions that produced it — typically allocation,…