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Scenario Analysis for a Single-Asset Price Shock

Article Quant Q&A · Author: WantToLearnNewSkills
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Summary

The document asks how to apply a scenario in which the stock portion of a portfolio falls while the bond and commodity positions are left unchanged. It illustrates a direct repricing approach: apply the assumed percentage loss to the stock holding, retain the other stated values, and add the resulting positions to obtain a new portfolio value. It then asks whether the known correlations among assets should also affect the scenario.

No answer or supporting analysis is included, so the document does not establish a standard practice or resolve how correlation should be used. The example is a one-factor shock with no specified changes to bonds or commodities. Correlation describes how returns have tended to move together; it does not by itself determine their returns under a particular stress. A scenario analyst would need to state whether the other asset moves are held fixed, specified separately, or modeled conditionally. The example is therefore useful as a prompt about assumptions, but not as a complete portfolio stress-testing method.

Key ideas

  • A direct scenario can revalue the shocked holding while keeping other asset values fixed.
  • The example asks whether correlations should influence the treatment of unshocked assets.
  • Correlation alone does not specify the returns of other assets in a particular stress scenario.
  • Scenario results depend on clearly stated assumptions about which asset prices change.

Tags

Portfolio constructionRisk managementMulti-assetEquities
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# Scenario Analysis - Real life application


# Scenario Analysis - Real life application












Given a portfolio consists of Stock = usd 40, Bond = usd 40, commodity =usd 20. Also given the correlation between these assets.

Scenario 1 : stock down by 30%

When performing scenario analysis, do we usually take correlation into account? or just do it this way:

Stock= 40*0.7=28 Bond= 40 Commodity= 20

Thus portfolio value becomes usd 88.

Is this the correct way to do scenario analysis?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.