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.
Downside protection: how to stress-test portfolio diversification
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Value-at-Risk: lets explore what it really means
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Stress-testing P1 portfolios
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Human nature, financial crises and investing in the face of uncertainty
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Why benchmark selection is a form of client communication
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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…
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,…
Testing Ground
Quintin looks at how stress testing can help estimate portfolio impacts with restructuring to limit the downside. With guidance, advisers…
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,…
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…
