Understanding the Purpose of Stress Testing in Portfolio Management

Very Easy Risk Management Applications Stress Testing

In portfolio management, stress testing is a crucial risk management application that helps assess the potential impact of extreme market conditions on a portfolio's value. Stress tests simulate hypothetical situations that could lead to significant losses. Which of the following best describes the primary purpose of conducting stress tests on investment portfolios?

To determine the expected return of a portfolio under normal market conditions.

To assess the potential impact of extreme market scenarios on the portfolio's value.

To optimize asset allocation based on historical performance.

Hint

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