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Conditional Value at Risk (CVaR)
Definition
CVaR (Conditional Value at Risk) answers the question: "If things go badly — worse than the 5th percentile outcome — how bad, on average, will they be?" It is calculated as the average of all outcomes beyond a specified VaR threshold. Unlike VaR, which only tells you the boundary of the tail, CVaR tells you the severity within the tail. A 95% CVaR of -28% means that in the worst 5% of scenarios, the average annual return was -28%. This makes CVaR a more complete tail risk measure than VaR alone.
In the Context of Endowment Management
CVaR is particularly relevant for endowment risk management because it quantifies the severity of bad outcomes — exactly the information investment committees need to assess whether their spending commitments are sustainable through severe market stress. A foundation with a 5% spending rate should understand not just that bad outcomes are possible but what the average bad outcome looks like.