Explanation:
Reverse stress testing begins by defining an adverse outcome (such as the failure of the firm or a catastrophic loss) and works backward to identify the specific scenarios, vulnerabilities, and hidden risk factors that could lead to that outcome. Because it explores "unthinkable" scenarios, it heavily relies on qualitative assessments and attempts to identify immeasurable or highly non-linear risks that standard stress testing might miss.
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Q.48 Which of the following types of stress testing most likely applies qualitative methods and seeks to analyze immeasurable risks and tries to identify circumstances that might cause a firm to fail?
A
Macroeconomic stress testing
B
Reverse stress testing
C
Model stress testing
D
Parameter stress testing
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