Implementing a Portfolio Stress-testing Programme

In previous articles Quintin Rayer gave an overview of portfolio stress-testing, what it can and cannot do, offered a definition, and outlined the range of stress-test methodologies available with a classification, before focusing on historical and artificial stress-tests.  In this sixth and final article in the series he explores the implementation of a portfolio stress-testing programme.

Meaningfully assessing portfolios risks is never easy, and extreme asset moves can negatively impact portfolios in ways which may not be captured by conventional risk measures. Diversification breakdown may mean that portfolio values are not protected. With guidance, stress-testing may be used to estimate portfolios impacts and if necessary appropriate restructuring can 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 sixth in a series making up a helpful introduction to IFAs less familiar with portfolio stress-testing.  The previous articles can be found here:

Q G Rayer (2017), Implementing a Portfolio Stress-testing Programme, DISCUS, available at http://discus.org.uk/implementing-portfolio-stress-testing-programme/, 3 pages, 21 June 2017.


 

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