How is the Return on VaR calculated?

The Return on VaR is calculated as the expected return of assets divided by the Value at Risk (VaR). This ratio provides a measure of the return generated for every unit of risk taken, as encapsulated by the VaR, which quantifies the potential loss in value of an asset or portfolio under normal market conditions over a set time period, given a specified confidence interval.

By focusing on the expected return relative to the VaR, this calculation helps assess the efficiency and effectiveness of investment strategies in managing risk. A higher Return on VaR indicates that the investments may be yielding higher returns for the level of risk taken, which is a desirable trait for portfolio managers seeking to optimize performance while mitigating potential losses.

The other options do not accurately reflect the relationship between returns and risk as represented by VaR. For instance, discussing total assets minus liabilities, net returns divided by total value, or comparing market value of assets to the risk-free rate fails to incorporate the specific risk measurement that VaR represents within the context of risk-adjusted returns.