Understanding Stress Testing in Portfolio Management

Easy Risk Management Applications Stress Testing

In the context of portfolio management, stress testing is a critical tool used by investment managers to assess how a portfolio might perform under extreme market conditions.

Consider a portfolio that is heavily weighted in technology stocks. The investment manager wishes to perform a stress test to evaluate the potential impact of a sharp decline in the technology sector on the overall portfolio value.

Which of the following statements best describes the purpose of stress testing in this scenario?

To ensure that the portfolio meets its target return under normal market conditions.

To predict exact future performance under specific scenarios.

To evaluate the potential loss in value of the portfolio under extreme adverse conditions.

Hint

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