FRM Part II · FRM Exam Part II · Market-Driven Scenarios: An Approach for Plausible Scenario Construction
A risk committee reviews a market-driven scenario result showing a 4% portfolio loss. Which statement reflects the correct way to use this result?
The 4% loss should be used as a plausible, internally consistent what-if outcome conditional on the chosen shocks. It informs exposure decisions but is not a forecast, a maximum loss, or a confidence-level measure like VaR.
- ATreat it as a forecast of the most likely next-quarter outcome
- BTreat it as the maximum possible loss for the portfolio
- CUse it as a plausible, internally consistent what-if outcome to inform exposures and actions, recognising it is conditional on the chosen shocksCorrect
- DTreat it as a statistical confidence-level loss comparable to a 99% VaR
Explanation
Scenario results are conditional what-if assessments tied to the chosen shocks and relationships. They are not forecasts, worst-case bounds, or confidence-level measures. Their value lies in informing decisions on exposures.
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