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Answer: Stress tests tend to compute losses from an accounting perspective while EC methods tend to compute them from a market perspective.
**Explanation:** D is correct. The key differences between stress testing and economic capital methods are: - **Stress tests** typically compute losses from an **accounting perspective** (focusing on accounting-based measures like earnings impact) - **Economic capital methods** typically compute losses from a **market perspective** (focusing on market value changes) Other key differences: - Stress tests use **ordinal rank arrangements** (ranking scenarios by severity) while EC methods use **cardinal probabilities** (quantitative probability estimates) - Stress tests focus on **longer periods** (e.g., several years) while EC methods focus on **shorter horizons** (e.g., point in time) - Stress tests focus on **conditional scenarios** (specific stress events) while EC methods focus on **unconditional scenarios** (all possible outcomes) Therefore, option D correctly identifies the accounting vs. market perspective difference between the two approaches.
Author: LeetQuiz Editorial Team
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Which of the following statements about stress tests versus economic capital (EC) methods is correct?
A
Stress tests tend to use cardinal probabilities, while EC methods use ordinal rank arrangements.
B
Stress tests tend to focus on shorter periods of time compared to EC methods.
C
Stress tests tend to focus on unconditional scenarios, while EC methods tend to focus on conditional scenarios.
D
Stress tests tend to compute losses from an accounting perspective while EC methods tend to compute them from a market perspective.
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