# Variance-Covariance VaR

Learn more about Variance-Covariance VaR

The **variance-covariance VaR** is a method of calculating VaR that is based on the **covariance of returns** of a portfolio or asset with its average return, as well as an estimate of the volatility of returns. This method assumes that returns follow a **normal distribution**, which is often the case for many financial assets.

We can calculate the covariance of returns with their average, which measures the linear dependence between returns and their average. We use the VaR formula to estimate the maximum expected loss with a **certain level of confidence**.

For example, if we want to calculate the 95% VaR of a stock portfolio, we can estimate the average return and volatility of the stocks, as well as their covariance with the average return. We can then use these estimates to calculate the 95% VaR of the portfolio.

The variance-covariance VaR is often used because it is simple to calculate and does not require detailed historical data. However, it may not be suitable for assets that have non-normal return distributions or for periods of market stress where volatility can vary significantly.

More info : *Investopedia*

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