Rev. Date April 4, 2022

What is the purpose of Scenario Analysis?

We designed Scenario Analysis to help subscribers estimate how portfolios and investments could react to certain market shocks. 

Which scenarios are available?

Scenario Analysis allows users to stress test portfolios and investments across various types of scenarios, such as:

  • Equity market performance. For example, estimate what could happen to a portfolio or investment if certain equity indices decline by a specified amount.

  • Emerging currency changes. For example, estimate what could happen to a portfolio or investment if emerging currencies lose a specific amount.

How do I create a new scenario?

Scenario Analysis comes pre-populated with several scenarios. However, a user can add a new scenario by clicking “Add another scenario...,” searching among the available scenarios, and entering a return for the scenario in the “Scenario Return” column. 

In order to change an existing scenario, simply change the value in the Scenario Return column, and the Estimated Return of the portfolio or investment will update.

What is the time horizon for the scenarios?

Scenario Analysis assumes the shock will occur over the next 30 days. 

What is the shock range available for Scenario Analysis?

Shocks are limited to 150% of the most extreme historical positive and negative returns observed for that index.

What is the Estimated Return?

The Estimated Return is the estimated return of the portfolio or investment over the next 30 days, under the specified scenario. This number is an estimate only and carries many uncertainties such as noise in estimating the portfolio’s or investment’s factor exposures. The error bands attempt to quantify this uncertainty.

Generally, how is the Estimated Return calculated?

Venn calculates the sensitivity of the scenario index’s returns as well as the portfolio’s or investment’s returns to the factors in the Two Sigma Factor Lens. By translating each return into the shared language of factor exposures, Venn can then estimate how a shock to one (here, the scenario index) would affect the other (the portfolio or investment).

Further, Venn uses two different methodologies depending on the size of the scenario index shock:

  • For shocks less than 2 standard deviations, a linear approach is used which does not model changing market conditions.

  • For shocks greater than 2 standard deviations, a regime-based methodology is used.

  • For shocks between 2 and 3 standard deviations, the two methodologies are blended.

What returns are used to determine the portfolio’s or investment’s factor exposures? 

The portfolio’s or investment’s factor exposures are calculated using at least the last 1 year of daily or monthly data for the portfolio or investment.[1]

How does Venn handle the portfolio’s or investment’s residual return?

Scenario Analysis explicitly measures the scenario’s impact on the portfolio’s or investment’s residual return. 

[1] The minimum amount of data required depends on data frequency and type of analysis. For Scenario Analysis, if a user’s portfolio or investment has daily or monthly data, Venn will require at least 1 year. For both daily and monthly data, Venn will prefer to use up to 3 years. For quarterly data, Venn requires 3 years (or 12 data points) but will prefer to use up to 9 years to run analysis. Portfolios or investments with quarterly data must be interpolated to perform Scenario Analysis.

This document highlights certain aspects of this feature. As an overview, it does not discuss all material facts or assumptions. Please see Important Disclosure and Disclaimer Information.

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