What Is CVaR (Expected Shortfall) and Why It Beats VaR
CVaR (Conditional Value at Risk), also called Expected Shortfall, answers: if things really go badly, how much could I lose on average?
VaR vs. CVaR: the key difference
95% VaR tells you that, on the worst 5% of days, you'll lose at least X. But it doesn't say how much you'll lose on those days — it could be just over the threshold, or a disaster.
95% CVaR goes further: it calculates the average loss across the worst 5% of days. It's more conservative and more informative about tail risk.
How it's calculated
- All daily returns are sorted from lowest to highest.
- The worst 5% (the days with the biggest drops) are selected.
- The average of those losses is computed.
The 95% CVaR is shown on ticker pages and in the Pro section of the portfolio optimizer.
Why it matters when building portfolios
Two portfolios can have the same volatility and the same Sharpe ratio, but very different CVaR if one has returns with a much fatter left tail. CVaR captures that hidden risk that standard deviation misses.
For portfolios with negatively skewed assets, CVaR is essential alongside max drawdown.