Incremental Value At Risk

Incremental value at risk is the amount of uncertainty added to or subtracted from a portfolio by purchasing a new investment or selling an existing investment. Investors use incremental value at risk to determine whether a particular investment should be undertaken, given its likely impact on potential portfolio losses. The idea of incremental value at risk was developed by Kevin Dowd in his 1999 book, "Beyond Value at Risk: The New Science of Risk Management."

Incremental value at risk is based on the value at risk measurement (VaR), which attempts to calculate the likely worst-case scenario for a portfolio as a whole in a given time frame. The entire value at risk measurement tells the analyst the amount by which the entire portfolio might drop if the bear case plays out. Incremental value at risk just looks at an investment individually and analyzes how much the addition of that single investment to the total portfolio might cause the portfolio to rise or fall in value. To calculate incremental value at risk, an investor needs to know the portfolio's standard deviation, the portfolio's rate of return and the asset in question's rate of return and portfolio share.