Benjamin64 Miller#15

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What is Conditional Value-at-Risk (CVaR) and why is it superior to VaR?

Conditional Value-at-Risk (CVaR), also called Expected Shortfall, measures the average loss beyond the VaR threshold. If VaR says “5% chance of losing $10,000,” CVaR estimates the average of those extreme cases, maybe $20,000. Institutions favor CVaR because it captures tail risk—losses in crises that VaR ignores. Benefits: fuller picture of downside risk, better regulatory alignment under Basel III. Risks: complexity and sensitivity to assumptions. Retail traders can approximate CVaR by reviewing their worst losing streaks and averaging them, revealing realistic pain levels. CVaR reminds traders that rare doesn’t mean impossible—and tail losses can wipe out years of gains if ignored.