FRM Part I · FRM Exam Part I · Stress Testing
A trading desk holds a single equity position worth USD 50 million with a beta of 1.2 to the market index. A stress scenario assumes the index falls 20% and the position's return is driven only by beta (no idiosyncratic loss). What is the stressed loss on the position?
The stressed loss is USD 12.0 million. With a beta of 1.2 and a 20% fall in the index, the position falls 24%, and 24% of USD 50 million equals USD 12.0 million. Ignoring beta would give USD 10 million, which understates the loss.
- AUSD 8.0 million
- BUSD 10.0 million
- CUSD 12.0 millionCorrect
- DUSD 14.4 million
Explanation
Position return = beta x index return = 1.2 x (-20%) = -24%. Loss = 24% x USD 50 million = USD 12.0 million. USD 10.0 million ignores beta, and USD 14.4 million wrongly multiplies the beta by 1.2 again.
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