FRM Part I · FRM Exam Part I · Stress Testing
A bank's risk team builds a stress scenario by selecting a specific past episode, such as the 1987 equity crash, and applying the observed changes in market risk factors to today's portfolio. Which description best fits this approach?
This is historical scenario analysis. The team takes risk factor changes actually observed in a past episode, such as the 1987 crash, and applies them to the current portfolio, rather than inventing a new event or starting from a target loss.
- AHistorical scenario analysisCorrect
- BHypothetical scenario analysis
- CReverse stress testing
- DMonte Carlo simulation with fitted parameters
Explanation
Historical scenarios reuse actual past market moves and apply them to the current portfolio. Hypothetical scenarios are built from judgment about possible future events. Reverse stress testing starts from a loss level and works back to the scenario, so it is not what is described.
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