Portfolio Stress Testing
Financial professionals are likely aware of the stress testing regulators have applied to banks and financial institutions to help identify how resilient their balance sheets would be to renewed market crisis. However, it may not have occurred to them that conceptually similar approaches can be applied to their own portfolios.
Meaningfully assessing portfolio risks is never easy. Often, conventional risk measures do not fully capture all risks inherent in a portfolio, particularly under difficult market conditions. Portfolio stress testing helps identify and quantify risks within a portfolio and can reassure an investor as to how their portfolio might respond to specific market outcomes or other concerns. Stress testing can be done against significant historical market events, or against some invented scenario that reflects their particular concerns.
For an introduction into stress testing we recommend starting with Managing risk: Stress-testing investment portfolios, with articles progressing in complexity to An Investigation of hypothetical variance-covariance matrix stress-testing for advance practitioners.
Investment portfolio stress-testing
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Testing Ground
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