Question: stress test test

transferpricing

Which of the following is NOT a disadvantage of using stress testing? Stress testing:

A) reflects the analyst’s intentional and unintentional misspecification of the model.
B) reflects only normal circumstances.
C) fails to include the simultaneous adverse movements of risk factors.


answer is B (easy)... but how about C?
The answer says:
Stress testing is susceptible, however, to the analyst’s intentional and unintentional misspecification of the model, the failure to examine the by-products of major factor movements (how does a change in one factor affect the value of another), and the failure to include the simultaneous adverse movements of risk factors.


I thought stress test is to include the simultaneous adverse movements of multiple risk factors????

PalacioHill

hellscream Wrote:
-------------------------------------------------------
> I thought stress test is to include the
> simultaneous adverse movements of multiple risk
> factors????

I agree !

NakedPuts2011

yeah, but the question asks NOT a disadvantage (kind of two negatives).

bkballa

C) "FAILS" to include the simultaneous adverse movements of risk factors.

3 negatives ?

mcmc

AMA Wrote:
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> C) "FAILS" to include the simultaneous adverse
> movements of risk factors.
>
> 3 negatives ?


agree!!! time for a break! let me take a break to order an IPAD2 for myself now for CFA celebration!

wake2000

BTON04 Wrote:
-------------------------------------------------------
> hellscream
>
> to your original statement "I thought stress test
> is to include the simultaneous adverse movements
> of multiple risk factors????", I believe this
> implies the fact that stress test fail to
> recognize correlations that exists between the
> factors that are being "stressed". So even
> though stress test may be run with multiple
> factors, the specifications are generally of the
> nature +10/-10% moves in interest rates, +10/-10%
> moves in equity prices without accounting for the
> correlations that exist between equity prices and
> interest rates.


I am convinced! cheers

ll11

i see why its B but man the tripe negative would def throw me off

Which of the following is an Advantage of using stress testing? Stress testing:


C) fails to include the simultaneous adverse movements of risk factors