Week 6 discussion 1

Analyze the concept of "stress test" as applied to financial institutions and create a better alternative for assessing the viability of a financial institution.

At its simplest, a stress test is a way of revaluing a portfolio using a different set of assumptions. The results of a stress test show the sensitivity of the portfolio to a particular shock. Stress tests can be useful because for most asset markets, the history of returns does not provide sufficient information about the behavior of markets under extreme events. Stress tests complement traditional models with estimates of how the value of a portfolio changes in response to exceptional but plausiblechanges in the underlying risk factors.

In individual financial institutions, stress tests have...