Capital at Risk and Value at Risk

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems. 

Understanding your portfolio's risk is important because it can be a predictor of your ultimate wealth. But how do you assess the riskiness of a diversified investment portfolio, which may contain stocks, bonds, derivatives, and cryptocurrencies? And how do you assess the relative risk of each type of investment? Two types of financial risk assessments that you can use to evaluate your risk are Capital at Risk (CaR) and Value at Risk (VaR).

What Is Capital at Risk and How Is It Calculated?

Capital at Risk (CaR) is an amount of capital that an individual or corporate entity sets aside to cover potential risks. For example, an insurance company typically receives premiums in cash. However, these companies are also required to maintain a surplus amount of cash in case they are forced to pay for losses and expenses that exceed the premiums collected. The amount of this surplus is called the capital at risk. The amount of capital at risk that insurance companies must set aside is determined by the number of estimated claims and the quantity of paid premiums.

CaR is also important under the US federal income tax code, particularly to those taxpayers seeking favorable tax treatment for their capital gains. To be afforded this favorable tax treatment, the IRS requires investors to have an amount of capital at risk in the underlying investment. This amount is dictated by the Internal Revenue Service (IRS) and the federal income tax code.

Is Capital at Risk the Same as Capital Risk?

Capital at Risk should not be confused with capital risk. Capital risk is the partial or total investment amount that you have at risk. For example, suppose you initially invested $10,000 in Bitcoin. This initial investment is your paid-in capital. Therefore, your capital risk is $10,000, even though your Bitcoin's present market value might be greater than or less than your original paid in capital.

Is Capital at Risk the Same as Risk Capital?

Capital at risk should also not be confused with risk capital. The term risk capital is often used to refer to capital that is invested in speculative investments. These investments are typically characterized as having a high degree of risk but coupled with the possibility of earning a high reward. Risk capital could include investments in a startup, a new cryptocurrency, or money used to fund your own business.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor. Thomas Wettermann is not an independent financial advisor.

Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary of Thomas Wettermann, and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.