FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure
A risk manager at a multi-strategy fund compares historical scenario stress tests with hypothetical scenario stress tests. Which statement is MOST accurate?
Historical scenarios are objective and easy to explain because they replay real events, but they may omit plausible shocks that have not yet happened. Hypothetical scenarios address that gap by using expert judgement, although they are subjective and not necessarily more severe.
- AHistorical scenarios are preferable because they can capture risks that have never occurred before
- BHypothetical scenarios cannot incorporate expert judgement and must be derived from past data
- CHistorical scenarios are objective and easy to explain but may omit plausible events that have not yet occurredCorrect
- DHypothetical scenarios are always more severe than historical scenarios
Explanation
Historical scenarios replay actual events, so they are credible and easy to communicate, but they are limited to what has happened. Hypothetical scenarios allow forward-looking judgement about novel events, though their severity is not automatically greater and they rely on subjective assumptions.
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