Risk
Stress test
Modelling what a portfolio would do under a specific severe scenario, rather than under average conditions.
How it works
Stress testing replays history or constructs a hypothetical: a 2008-style credit event, a rapid rate rise, a currency collapse. The output is a loss figure attached to a describable world.
It complements statistical measures because it does not assume anything about distributions. It asks a direct question and gets a direct answer.
Related terms
- Value at riskAn estimate of the most you would expect to lose over a period, at a stated confidence level.
- Scenario analysisExamining portfolio outcomes across several plausible futures rather than forecasting one.
- DrawdownThe fall from a portfolio’s previous peak to its lowest point before it recovers.
- Black swanA rare, high-impact event that was not predicted and is explained confidently afterwards.
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