Limitations of Value-at-Risk in Risk Measurement

As a portfolio manager at an investment firm, you are frequently tasked with assessing and managing risk across various investment strategies. One method that has garnered significant attention for its ability to measure downside risk is Value-at-Risk (VaR). Your firm uses a historical simulation approach to estimate VaR at a 95% confidence level. Given a historical data set of returns for your portfolio, you find that the 5th percentile return is -10% over a specified time horizon.

Your colleague suggests that VaR is sufficient for understanding all types of risk associated with the portfolio. You need to evaluate this assertion and consider the limitations of VaR in the context of risk management.