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FRM Part II · FRM Exam Part II · Validating Bank Holding Companies' Value-at-Risk Models for Market Risk

Which feature best distinguishes a sensitivity analysis from a scenario-based stress test when validating a VaR model?

Sensitivity analysis changes one input or assumption at a time to measure its effect on the output, whereas a stress test applies a coherent scenario of extreme moves across multiple risk factors, whether historical or hypothetical.

  1. ASensitivity analysis varies one input or assumption at a time to see its effect, while stress tests apply a coherent set of extreme market movesCorrect
  2. BSensitivity analysis always uses historical crises, while stress tests use hypothetical data
  3. CSensitivity analysis estimates probabilities of losses, while stress tests do not
  4. DSensitivity analysis is performed only by regulators

Explanation

Sensitivity analysis isolates the impact of changing a single parameter or assumption. Stress tests apply a joint scenario of extreme moves across risk factors, which may be historical or hypothetical. Neither is restricted to regulators.

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