Stress Testing

[mgarcia]

I saw this question and can not understand the answer:

Which of the following is true about stress testing?
a) It is used to evaluate the potential impact on portfolio values of unlikely, although plausible, events
or movements in a set of financial variables.
b) It is a risk‐management tool that directly compares predicted results to observed actual results.
Predicted values are also compared with historical data.
c) Both A and B above are true
d) None of the above are true

Answer A

A is correct as it describes 'stress testing'.
B is incorrect as it is not about 'stress testing'.
C is not correct, as B is incorrect.
D is incorrect as A is correct.

why B is not about Stress Testing? What is it about?
Thanks,

 

[David Harper CFA FRM]

Hi MGT,

I think it intends (B) to refer to BACKtesting; e.g., compare actual losses to predicted (VaR) losses. Stress test might well use actual historical as input calibration, but its essence is forward-looking stress of risk factors. The reference to "actual observed" suggest HISTORICAL data a therefore a backtest IMO...Thanks, David

 

[mgarcia]

Thanks! As always very clear and explicit replays