A more sophisticated technique to measure portfolio risk is value-at-risk (VaR). Whereas a portfolio sensitivity analysis measures portfolio value changes for a specific interest rate change for all securities, VaR measures the maximum potential loss on a portfolio for a specified confidence level and a specified time period. For example, consider a portfolio manager who measures VaR at a 95 percent confidence level and for a 90-day time horizon. If the portfolio’s VaR is $8 million, there is only a 5 percent chance that at the end of 90 days the portfolio will have decreased.
