Stress Test Scenarios
In short
Simulated portfolio losses under historical crisis conditions
Stress tests answer: 'What if 2008 happened again?' They replay historical market crashes on your current portfolio to show how much you could lose. Think of it as a fire drill for your investments — it helps you prepare for the worst before it happens.
Stress testing applies historical crisis return patterns to your current portfolio allocation. Each scenario uses actual sector-level returns from past market events (2008 Financial Crisis, COVID crash, Dot-Com bubble, etc.) weighted by your portfolio's composition. The result shows projected dollar losses and percentage drawdowns, helping you assess whether your portfolio can withstand extreme conditions. Unlike VaR which uses statistical models, stress tests use real observed market data.
Thresholds
- <-50%
- Catastrophic loss
- -25 to -50%
- Severe loss
- -10 to -25%
- Moderate impact
- >-10%
- Resilient
Related concepts
- Maximum Drawdown — If your portfolio hit $10,000 then fell to $6,000 before recovering, the max drawdown is 40%. It measures the worst experience a real investor would have endured.
- Value at Risk (VaR 95%) — VaR 95% says: 'On 95% of days, you won't lose more than X.' If your portfolio's daily VaR is $1,000, there's only a 5% chance of losing more than $1,000 in a single day.
- CVaR (Conditional VaR) — While VaR says 'you won't lose more than X on 95% of days,' CVaR asks 'but on those worst 5% of days, how much do you lose on average?' If VaR is $1,000, CVaR might show the average loss in that worst 5% is actually $1,800 — a fuller picture of how bad the bad days really get.
- Portfolio Volatility — Portfolio volatility measures how much your combined investments bounce around. Unlike individual stock volatility, it accounts for diversification — when some holdings go up while others go down, they partially cancel out, reducing overall portfolio risk.