In 2009, U.S. banking regulators subjected 19 of America's largest and most important banks (the "too-big-to-fail" ones) to so-called stress tests in order to understand how well each bank's capital reserves would meet different challenging economic scenarios. Regardless of the arguments for and against the execution of that test, the concept is interesting outside of the banking industry context. For instance, which strategies are best able to deflect volatility in client portfolios when real market stress shows up?
Unfortunately for most investors, the past few weeks have provided ample opportunity for analysts to gauge risk mitigation (and lack thereof). Consider Figure 1. Volatility, as measured by the Chicago Board Options Exchange Market Volatility (VIX) index, has increased sharply in recent weeks amid deep concerns about Eurozone banks and the fiscal health of governments in much of the developed world.
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