The results of ‘desk-level’ stress tests cannot be added together to arrive at institution wide estimates because:

The results of ‘desk-level’ stress tests cannot be added together to arrive at institution wide estimates because:
A . Desk-level stress tests tend to ignore higher level risks that are relevant to the institution but completely outside the control of the individual desks.
B . Desk-level stress tests focus on desk specific risks that may be minor or irrelevant in the larger scheme at the institution level.
C . Desk-level stress tests tend to focus on extreme movements in risk parameters (such as
volatility) without considering economy wide scenarios that may represent more realistic
and consistent situations for the institution.
D . All of the above

View Answer

Answer: C

Explanation:

All the above listed reasons are valid explanations as to why an institution level stress test cannot be estimated by merely summing up the results of the stress tests of the individual desks.