In: Finance
A stress test in finical marketing means: (check all that apply)
Tries to incorporate all the interconnections between financial institutions.
Does not look at historical returns, and looks at all the details of the portfolios and their vulnerabilities during all sorts of potential financial crises.
Aims to test the behavior of historical returns and their fluctuations during all sorts of potential financial crises.
Tries to incorporate all potential economic and financial crises, such as recessions, appreciation and depreciation of currency, liquidity crisis, etc.
The correct answer is Statement 3 & 4
Stress testing refers to the simulation methos where the risk and the quality of assets is determined using hypothetical scenarios or based on historical returns. This helps the institutions to check how much assets or securities has potential to cope up with the adverse situations and the firms can make strategies relating to vulnerable assets that are more prone to failure prior to the incidents.
The Methods of stress testing includes Hypothetical Scenarios, Historical Scenario and Situation Specific Scenarios
In Historical scenario, assets quality are gauged according to the crises that have passsed like 2008 Recession, and in Hypothetical scenarios various economic and financial crisis like recession, Liquidity crisis is used and in last method which is Situation specific scenarios quality are checked according to a particular scenario like appreciation of currency, depreciation of currency and fall in S&P Index of 5% etc.