In a previous article Quintin Rayer gave a brief overview of portfolio stress-testing. This follow-up article looks more closely at what portfolio stress-testing is, what it can and cannot do, and offers a definition.
Extreme market moves can negatively impact portfolios in ways that may not be captured by conventional risk measures; while diversification breakdown may mean that portfolio values are not protected. With guidance, an investment manager may be able to use stress-testing to estimate the impact on your clients’ portfolios and arrange for appropriate restructuring to limit the downside. This helps demonstrate that advisers and investment managers are working hard to protect portfolios and clients can be reassured that robust investment processes are in place.
This article is the second in a series making up a helpful introduction to IFAs less familiar with portfolio stress-testing. The previous article can be found here.
Q G Rayer (2017), A more detailed look at portfolio stress-testing, DISCUS, available at http://discus.org.uk/portfolio-stress-testing/, 3 pages, 13 February 2017.