FRM Part I · FRM Exam Part I · Stress Testing
A risk manager at a bank wants a stress test that begins with a specific adverse event, such as a sovereign default in a major trading partner, and then traces its effects through the portfolio. Which approach is this?
This is a hypothetical scenario analysis. It starts from a specific plausible adverse event that need not have happened before, then traces its effects across several risk factors. It differs from historical replay, single-factor sensitivity shocks, and reverse stress testing, which begins from a defined failure outcome.
- AHistorical scenario analysis using a past crisis date
- BHypothetical scenario analysis built from a narrative eventCorrect
- CSensitivity analysis shocking one risk factor at a time
- DReverse stress testing starting from a failure outcome
Explanation
A hypothetical scenario starts from a plausible but not necessarily historical event and propagates its consequences across risk factors. Historical scenarios replay past episodes. Sensitivity analysis moves a single factor without a narrative. Reverse stress testing starts from the failure outcome and works back to the causes.
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