Stress Testing
Simulating extreme market scenarios to see how your portfolio would behave during crashes, recessions, or rate spikes.
What You Need to Know
Stress testing applies historical or hypothetical shocks (2008 crisis, dot-com crash, stagflation) to your portfolio to expose vulnerabilities.
Why Stress Test:
- Reveal concentration risk (too much in one asset class)
- Estimate potential drawdowns and recovery times
- Decide whether to adjust allocations before a crisis hits
How It Works:
- Define scenarios (e.g., -35% stocks, +2% bonds, +10% commodities)
- Apply those returns to your current allocation
- Review losses, cash needs, and rebalance plan
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/asset-allocation
Related Calculators & Tools
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.