@zaraleacock
Scenario-based portfolio stress testing uses baseline, optimistic, pessimistic, black swan, and regulatory shock frameworks. Each scenario is parameterized with expected returns, volatilities, and drawdown assumptions derived from historical analogs. Monte Carlo simulations generate probability distributions of outcomes. Drawdowns are then aggregated, and win rates computed as the fraction of trials with positive returns. For example, optimistic scenarios may yield +30% upside with 70% win rate, while regulatory shocks imply -50% drawdowns with 20% survival probability. This structured approach forces capital allocators to quantify resilience against both tail and cyclical risks.
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