Conditional Value at Risk (CVaR)
CVaR, also called Expected Shortfall, measures the average loss expected in the tail beyond the VaR threshold — the expected loss given that VaR has been exceeded.
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Definition
CVaR, also called Expected Shortfall, measures the average loss expected in the tail beyond the VaR threshold — the expected loss given that VaR has been exceeded.
Use case
Used in risk management workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Conditional Value at Risk (CVaR)
While VaR asks 'How bad can it get at a certain confidence level?', CVaR asks 'If it gets that bad, what's the average damage?' CVaR is a coherent risk measure (mathematically satisfying certain axioms) while VaR is not, as it ignores the shape of the tail beyond the cutoff.
Example: A portfolio has 95% VaR of $10M and 95% CVaR of $15M. This means: 5% of the time, losses exceed $10M, and when they do, the average loss is $15M. CVaR better captures severe tail events.