Marginal VaR

Marginal VaR is the additional amount of risk that a new investment position adds to a portfolio. Marginal VaR (value at risk) allows risk managers to study the effects of adding or subtracting positions from an investment portfolio. Since value at risk is affected by the correlation of investment positions, it is not enough to consider an individual investment's VaR level in isolation. Rather, it must be compared with the total portfolio to determine what contribution it makes to the portfolio's VaR amount.

An investment may have a high VaR individually, but if it is negatively correlated to the portfolio, it may contribute a much lower amount of VaR to the portfolio than its individual VaR. For example, consider a portfolio with only two investments. Investment X has a value at risk of $500, and investment Y has a value at risk of $500. Depending on the correlation of investments X and Y, putting both investments together as a portfolio might result in a portfolio value at risk of only $750. This means that the marginal value at risk of adding either investment to the portfolio was $250.

When measuring the effects of changing positions on portfolio risk, individual VARs are not adequate, because volatility measures the uncertainty in the return of an asset in isolation. As part of a portfolio, what matters is the asset's contribution to portfolio risk. Marginal VaR helps isolate added security-specific risk from adding an additional dollar of exposure.