In previous articles published on DISCUS, Quintin Rayer gave a brief overview of portfolio stress-testing, what it can and cannot do and offered a definition. This third article in the series outlines the range of stress-testing methodologies available and offers a classification.
To recap, extreme market moves can negatively impact portfolios in ways which may not be captured by conventional risk measures and diversification breakdown may mean that portfolio values are not protected. With guidance, you 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.
- Q G Rayer (2017), Managing risk: stress-testing investment portfolios, DISCUS, available at Discus – Managing risk: Stress testing investment portfolios, 3 pages, 26 January 2017.
- Q G Rayer (2017), A more detailed look at portfolio stress-testing, DISCUS, available at Discus – Portfolio Stress Testing, 3 pages, 13 February 2017.
Q G Rayer (2017), The different types of portfolio stress testing, DISCUS, available at http://discus.org.uk/different-types-portfolio-stress-tests/, 3 pages, 9 March 2017.