Portfolio value stress tests allow you to examine the effect of various scenarios on the value of your portfolio. You can use stress tests to investigate how the value of your portfolio would change under a hypothetical scenario or under a historical crisis that actually occurred in the past. For example, a single stress test will look at the performance of various indices during a specific period of time (i.e. during the market drawdown caused by the Lehman collapse of 2008). Based on the fund to factor relationship (beta) and the allocation (weight) of the fund in the portfolio, the stress test will determine how your portfolio would perform if this scenario were to occur again. A stress test report typically consists of several scenarios.
We then break down the stress tests at the fund level to display the top ten funds based on the greatest negative impact.
Investors who are required to select and monitor investment managers should develop a basic understanding of investment statistics. Quantitative tools can provide you with good insight that you can use in your qualitative interviews with managers and when monitoring your investments.