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.

Stress-testing P1 portfolios

Assessing portfolio risks is never straightforward, and extreme asset moves can negatively impact portfolios in ways which may not be…

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Human nature, financial crises and investing in the face of uncertainty

While markets regularly seem to have periods of falling prices, advisers can often seem to focus on the upside, directing…

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Why benchmark selection is a form of client communication

Many advisers use collective investment funds for their clients’ investment needs. In many cases, these are managed relative to some…

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The alchemy of risk (and communicating risk to clients)

In this article Dr Quintin Rayer looks at issues around risk in financial products; the forms risk may take and…

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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,…

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Testing Ground

Quintin looks at how stress testing can help estimate portfolio impacts with restructuring to limit the downside. With guidance, advisers…

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Artificial portfolio stress-testing and how advisers add value to this process

In previous articles Quintin Rayer gave an overview of portfolio stress-testing, what it can and cannot do, offered a definition,…

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A Flaw in the Ointment

Quintin looks at how putting portfolios through stress testing can make sure that trustees are actively working to protect these…

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Historical Portfolio Stress-testing

In previous articles Quintin gave an overview of portfolio stress-testing, what it can and cannot do, offered a definition and…

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Testing Times, Part 2

In a follow-up to his article of October 2016 in the STEP Journal, Quintin discusses the pros and cons of…

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