Stress Testing Portfolio Risk
A holistic analysis of risk includes understanding a portfolio's sensitivity to forecasted and extreme events.
While tracking error and VaR focus on measuring current or historical risk, stress testing reveals how well a portfolio is positioned in the event your forecasts prove true. Stress Testing also lends insight into a portfolio's vulnerabilities. Though extreme events are never certain, studying their performance implications strengthens understanding.
FactSet's stress testing lets you choose between two calculation algorithms. In an Exponentially Weighted Stress Test, historical periods more like your defined scenario receive a more significant weighting in the predicted outcome. The defined decay rate lets you manipulate the relative importance of the most similar periods. In the standard stress test, each period is equally weighted.
