Definition
Scenario risk analysis models portfolio performance under defined market conditions (recession, stagflation, rate shock, geopolitical crisis). Unlike VaR which uses statistical probability, scenario analysis asks "what if?" with specific, coherent assumptions about multiple simultaneous market moves. It reveals concentration risks that purely statistical approaches may miss.
lightbulb Example
Recession scenario: equities -30%, credit spreads +300bps, rates -100bps, USD +5%. Portfolio impact: equities lose $3M, credit bonds lose $1.5M, duration gains $800K, FX gains $200K. Net scenario loss: $3.5M.
verified_user Key Points
- Tests coherent multi-factor scenarios
- Complements statistical risk measures like VaR
- Reveals hidden concentration risks
- Required by regulators for bank stress testing