Which of the following are valid techniques used when performing stress testing based on hypothetical test scenarios:

Which of the following are valid techniques used when performing stress testing based on hypothetical test scenarios:

I. Modifying the covariance matrix by changing asset correlations

II. Specifying hypothetical shocks

III. Sensitivity analysis based on changes in selected risk factors

IV. Evaluating systemic liquidity risks
A . I, II, III and IV
B . II, III and IV
C . I, II and III
D . I and II

View Answer

Answer: D

Explanation:

Each of these represent valid techniques for performing stress testing and building stress scenarios. Therefore d is the correct answer. In practice, elements of each of these techniques is used depending upon the portfolio and the exact situation.