Which of the following is NOT a disadvantage of using stress testing? Stress testing: A) reflects the analyst’s intentional and unintentional misspecification of the model. B) reflects only normal circumstances. C) fails to include the simultaneous adverse movements of risk factors. answer is B (easy)… but how about C? The answer says: Stress testing is susceptible, however, to the analyst’s intentional and unintentional misspecification of the model, the failure to examine the by-products of major factor movements (how does a change in one factor affect the value of another), and the failure to include the simultaneous adverse movements of risk factors. I thought stress test is to include the simultaneous adverse movements of multiple risk factors???
hellscream Wrote: ------------------------------------------------------- > I thought stress test is to include the > simultaneous adverse movements of multiple risk > factors??? I agree !
yeah, but the question asks NOT a disadvantage (kind of two negatives).
C) “FAILS” to include the simultaneous adverse movements of risk factors. 3 negatives ?
we are all under stress testing now.
AMA Wrote: ------------------------------------------------------- > C) “FAILS” to include the simultaneous adverse > movements of risk factors. > > 3 negatives ? agree!!! time for a break! let me take a break to order an IPAD2 for myself now for CFA celebration!
hellscream to your original statement “I thought stress test is to include the simultaneous adverse movements of multiple risk factors???”, I believe this implies the fact that stress test fail to recognize correlations that exists between the factors that are being “stressed”. So even though stress test may be run with multiple factors, the specifications are generally of the nature +10/-10% moves in interest rates, +10/-10% moves in equity prices without accounting for the correlations that exist between equity prices and interest rates.
BTON04 Wrote: ------------------------------------------------------- > hellscream > > to your original statement “I thought stress test > is to include the simultaneous adverse movements > of multiple risk factors???”, I believe this > implies the fact that stress test fail to > recognize correlations that exists between the > factors that are being “stressed”. So even > though stress test may be run with multiple > factors, the specifications are generally of the > nature +10/-10% moves in interest rates, +10/-10% > moves in equity prices without accounting for the > correlations that exist between equity prices and > interest rates. I am convinced! cheers
i see why its B but man the tripe negative would def throw me off Which of the following is an Advantage of using stress testing? Stress testing: C) fails to include the simultaneous adverse movements of risk factors
best way to approach these imo is go through all 3 options and write down ‘adv’ and ‘disdv’ where possible then go back to question and read what they are asking. double triple negatives are just bullshit ways to ensure people make mistakes…although i guess it does illustrate ability to deal with logic :-0 a) disadvantage b) c) disadvantage Question asking us to looking for Not Disadvantage… so B
v tricky