Understanding Outcomes of Stress Testing

As a portfolio manager at a mid-sized investment firm, you are tasked with evaluating the potential risks faced by your firm's portfolio under extreme market conditions. You decide to conduct a stress test to understand how various asset classes would perform during significant economic downturns or market crises. Your primary focus is to identify vulnerabilities in the equity and fixed income allocations of the portfolio.

The stress test scenarios you consider include a severe recession, a sharp rise in interest rates, and a geopolitical crisis that leads to heightened volatility across global markets. You aim to assess the impact of these scenarios on expected returns and potential losses while ensuring the portfolio's overall risk exposure remains manageable.

Given this context, which of the following is the most appropriate outcome that a well-designed stress test should deliver for your portfolio?