A Five Step Approach to Stress Testing Your Portfolio

With the continuing financial markets tumult, regulators are requiring assurances that portfolios can withstand economic downturns. Stress testing to measure and mitigate your portfolio's risk is both a savvy risk management strategy for US companies and an absolute mandate for international businesses. Stress testing can help you navigate your portfolio through rough times, turn less-than-ideal data into positive findings, assess portfolio vulnerabilities, prepare for events that interrupt your ability to execute business as usual, and recognize the warning signs of unexpected risk. This paper provides insights into stress testing and addresses: • Asking the right questions during stress testing • Balancing industry-wide data with your portfolio's specific characteristics • Selecting macro-economic variables • Selecting scenarios for stress testin