Risk Management - Stress testing

John Nicholson is in charge of the risk management committee for Beta Portfolio Managers. Beta has a variety of bonds in their portfolio of differing durations, call features, and coupons. He is worried about the impact on the firm’s bond portfolio from simultaneous changes in interest rates, the shape of the yield curve, and interest rate volatilities. Which of the following forms of stress testing is he most likely to utilize?

A) Worst-case scenario analysis. B) Factor push analysis. C) Stylized scenarios. *Qbank Question

I think since this person is worried about a simulatneous change in all of those factors then they would use a stylized scenario (even though I’ve never heard it called that)


what’s the answer?

I think A. (just a guess)

Kaplan answer: C

In stylized scenarios, one or more risk factors are changed to measure their impact on the portfolio. Some forms of stylized scenarios are similar to industry standards. The risk factors mentioned in the question are from those specified by the Derivatives Policy Group. In factor push analysis, a factor or factors are pushed to an extreme to examine the impact on the portfolio. In worst-case scenario analysis, all factors are pushed to their most damaging impact on the portfolio.

^ I meant C but wrote b haha. I need more coffee!