Stress testing is a computer simulation technique used to test the resilience of institutions and investment portfolios against possible future financial situations. Such testing is customarily used by the financial industry to help gauge investment risk and the adequacy of assets and help evaluate internal processes and controls. In recent years, regulators have also required financial institutions to carry out stress tests to ensure their capital holdings and other assets are adequate.Stress testing is a computer-simulated technique to analyze how banks and investment portfolios fare in drastic economic scenarios.Stress testing helps gauge investment risk and the adequacy of assets, as well as to help evaluate internal processes and controls.Stress tests can use historical, hypothetical, or simulated scenarios.Regulations require banks to carry out various stress-test scenarios and report on their internal procedures for managing capital and risk.The Federal Reserve requires banks with $100 billion in assets or more to perform a stress test.Companies that manage assets and investments commonly use stress testing to determine portfolio risk, then set in place any hedging strategies necessary to mitigate against possible losses. Specifically, their portfolio managers use internal proprietary stress-testing programs to evaluate how well the assets they manage might weather certain market occurrences and external events.Asset and liability matching stress tests are widely used, too, by companies that want to ensure they have the proper internal controls and procedures in place. Retirement and insurance portfolios are also frequently stress-tested to ensure that cash flow, payout levels, and other measures are well aligned.Become a supporter of this podcast: https://www.spreaker.com/podcast/investment-terms--4432332/support.

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