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) Factor push analysis. B) Stylized scenarios. C) Worst-case scenario analysis.
A ???
C ?
I’ll go with C since he’s looking for simultaneous changes.
I would go for B since he’s looking for simultaneous changes. A worst-case scenario will be a special case of stylized scenario(where if it is possible that all key variables can take a downturn at the same time will be taken into account) in my humble opinion which can be very wrong given that I havent read this thing in a million years (or so it seems)
I adjust my answer to C. Just looked up the texts and well the stylized scenario isnt listed under the stress testing. As the question asks for stress testing it has to be C. Btw what do you guys think about stylized scenarios being a better substitute than worst case scenario analysis?
Glad to see that most of us made the same mistakes as I did. Your answer: A was incorrect. The correct answer was B) Stylized scenarios. 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.
sgarg.cfa Wrote: ------------------------------------------------------- > I adjust my answer to C. Just looked up the texts > and well the stylized scenario isnt listed under > the stress testing. > sgarg.cfa Do you use Schwezer? The reason I ask that because I also couldn’t find the stylized scenario in my own notes, as I wrote this part of notes based on Schwezer. I just want to confirm whether it is something mentioned in CFAI text but Schwezer had omitted to include. Stylized scenario testing did appear in the AM essay of either 07 or 08. So candidates do have to study it.
James@Houston Wrote: ------------------------------------------------------- > sgarg.cfa Wrote: > -------------------------------------------------- > ----- > > I adjust my answer to C. Just looked up the > texts > > and well the stylized scenario isnt listed > under > > the stress testing. > > > > > > sgarg.cfa > > Do you use Schwezer? The reason I ask that > because I also couldn’t find the stylized scenario > in my own notes, as I wrote this part of notes > based on Schwezer. > > I just want to confirm whether it is something > mentioned in CFAI text but Schwezer had omitted to > include. > > Stylized scenario testing did appear in the AM > essay of either 07 or 08. So candidates do have > to study it. It is on page 87 Schweser book4
Volume 5 page no. 247-248 mentions stylized scenario. (CFAI texts) However I want to question the validity of the answer as CFAI texts clearly mention that stylized scenarios are not a form of stress testing but a part of scenario analysis. @pupdawg Have you taken the question from Schweser? If yes then the question is wrong and instead of stress testing it should be scenario analysis.
yes it was schweser
IMO, the definitions & boderlines are not distinct/tangible in CFAI text too.
I think the key words for me were “simultaneous changes”. Now they say that the factors are changed to see what impact they have on the portfolio, then I would say its a factor-push analysis.
Thks folks. I see why I couldn’t find it under stress testing earlier. It seems that where stylized scenarios test falls under is quite loose. Look at the 08 AM exam Q7 part B both the paragraph and Q sentence, it seems it is a type of stress testing there. Nevertheless, as long as we know what each of the testings is, we should be okay. Note that it can be an open-end Q like this one in 08.
Is “B” just another name for scenario analysis, or is “B” its own beast? Because I figured it was just a different name for scenario analysis and chose “B” as my answer.