Short Description: This widget can be used to forecast the behavior of the portfolio under extreme macro events.
When to use: Correlations and volatilities tend to increase during market extreme events. Therefore it is critical to forecast what might happen to the portfolio before these events take place.
Widget Components: The Stress Test widget has 2 main components:
- A dynamic graph with grey bars representing portfolio-level response to macro shocks
- A dynamic graph with red/blue bars representing security-level response to shocks
The grey bars represent the expected PL of the portfolio for different shocks of an exogenous index, within a range that is automatically calculated by Everysk. In certain templates, a specific grey bar might already be selected to highlight if an upside or downside shock is the most relevant for that template. By clicking on that bar, you will unlock the highlight.
The red/blue bars are connected to the left graph. It represents the contributions from positions (or another aggregation such as sectors) to portfolio tail properties, per shock. The sorting is by Expected attribute.
When the number of securities in the portfolio exceeds 10, only the top and bottom 5 names are shown.
The following simple example illustrates how to interpret these bars: a portfolio with 100 shares of Apple and Facebook, hedged by shorting 100 shares of SPY is depicted below on a market down scenario (orange highlight):
Both APPL and FB are contributing to the downside of the portfolio (red bars). Also, despite market falling, these positions could still contribute to the right tail of the portfolio, but with small magnitudes.
Conversely, the short SPY has a more defined behavior on markets falling. It will add positive contribution to the whole portfolio distribution (both bars are blue)
Users can determine in a visual way, which security is adding more left tail risk under which shock, as an example. Another important piece of information derived from this widget is the amount of asymmetric behavior in the portfolio. For a symmetric shock on any factor, we can compare the leftmost and rightmost grey bars. In general, the sizes will be similar but sometimes, specially in portfolios with options, they will be quite different indicating asymmetric responses to symmetric shocks.
As you move the mouse sideways over grey bars, the graph on the right will change accordingly. The individual contributions on the right graph are sorted from largest expected PL (on top) to lowest (bottom) for the specific shock that is active on the left.
If you want to zoom in a specific shock, click over that grey bar and move the mouse to the right graph to see the individual properties (CVaR-,Expected,CVaR+). Summing all the individual properties will result in the portfolio overall properties. In order to unlock the grey bar, select it again. The 3 properties are explained below:
- CVaR- : The average of the worst 5-percentile from the forward looking PL distribution of the portfolio.
- Expected: The average of the whole forward looking PL distribution of the portfolio.
- CVaR+ : The average of the best 5-percentile from the forward looking PL distribution of the portfolio.