Skip to content

FRM Part I · FRM Exam Part I · Stress Testing

A risk manager at a bank compares two approaches to stress testing. Approach X applies a hypothetical, severe but plausible macroeconomic scenario (for example, a deep recession combined with a sharp equity decline) to the whole portfolio. Approach Y shocks one risk factor at a time by a fixed amount (for example, a 200 basis point parallel rise in rates). Which description is correct?

Approach X is scenario analysis because it moves multiple risk factors together under a coherent narrative, while Approach Y is sensitivity analysis because it shocks a single factor in isolation. Backtesting is a different exercise that compares model forecasts with realized results.

  1. AX is a scenario analysis and Y is a sensitivity analysisCorrect
  2. BX is a sensitivity analysis and Y is a scenario analysis
  3. CBoth X and Y are scenario analyses because both use hypothetical shocks
  4. DBoth X and Y are backtests because both rely on stressed inputs

Explanation

Scenario analysis moves many risk factors together under a coherent narrative, as in X. Sensitivity analysis moves a single factor in isolation, as in Y. Option B reverses the definitions. Backtesting compares model forecasts with realized outcomes, which neither approach does.

Did you get it right without looking?

One question tells you little. A timed set on Stress Testing shows your real accuracy, how long you take and where you lose marks.

Practise Stress TestingFree diagnostic mock

More Stress Testing questions