Stress Test
Stress tests are used to forecast how a portfolio will react in extreme market environments. Stress tests tend to be based either on historical events (Black Monday, Russian Debt Crisis, etc.), or simple scenarios (e.g. equity markets down 10%, and gold up 20%). Because stress tests deal with extreme events it is important that options and any other non-linear instruments are fully repriced. It is also important to consider possible non-linear relationships between securities and market indexes.