Risk Management With Stress Testing: Implications For Portfolio Selection And Asset Pricing
- Topics:
- Risk Analysis and Management
- Tags:
- Asset,
- Asset Pricing,
- Business Operations,
- Portfolio,
- Real Estate,
- Risk Management,
- Security,
- Stress Testing,
- University Of Minnesota
- Source:
- University of Minnesota
FREE Registration is required
Overview: Stress Testing (ST) is often used by banks and securities firms to set risk exposure limits. Accordingly, a model is examined with an agent who faces K binding ST constraints and another who does not. Four results were obtained. First, the constrained agent's optimal portfolio exhibits (K+2)-fund separation. Second, the effect of the constraints on the optimal portfolio is identical to that of an adjustment in the expected returns of the risky securities that tends to lower them, thereby increasing the optimal portfolio's weight in the riskfree security (or the minimum variance portfolio when this security is not available). Third, the market portfolio is inefficient. Fourth, a security's expected return is affected by both its systematic risk and its idiosyncratic returns in the states used in the constraints.
(Is this item miscategorized? Does it need more tags? Let us know.)
Format: PDF | Size: 817KB | Date: Jun 2006 | Pages: 38
