Understanding Stress Testing in Portfolio Management

Easy Risk Management Applications Stress Testing

As a portfolio manager for a diversified investment fund, you are responsible for evaluating the robustness of your portfolio in the face of potential market shocks. You decide to conduct a stress testing analysis to simulate extreme market conditions and their impact on your portfolio's performance. Stress testing will help you assess the potential risks and prepare for adverse scenarios.

Which of the following statements best describes the purpose of stress testing in the context of portfolio risk management?

Stress testing is used primarily to estimate the expected returns of a portfolio under normal market conditions.

Stress testing helps in assessing how a portfolio would react to severe market disruptions, allowing for better risk management.

Stress testing serves to validate the accuracy of the historical performance of funds over the previous year.

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