Extreme Risk
On the Scientific Portfolio platform, we present two key Extreme Risk functionalities, introducing another dimension to a portfolio’s risk analysis by incorporating downside tail risk. These functionalities use our risk model and long-term risk factors to simulate historical returns, making it possible to robustly estimate a portfolio’s expected loss during an extreme scenario.
Maximum Drawdown: This feature shows a portfolio's largest single drop from peak to trough in value. In cases where the length of historical returns differs between portfolios, our long-term risk model is used to simulate systematic returns, ensuring that Maximum Drawdown is comparable across different portfolios, regardless of data availability.
Extreme Losses: This feature quantifies the Conditional Value at Risk (CVaR), offering insight into the worst week of losses to be expected in a given year. It is a more conservative assessment of portfolio risk than volatility. Due to the challenge of estimating CVaR with sparse data, we use our long-term risk model to generate more data, making it possible to provide a robust estimate of extreme risk and decompose this risk into contributions attributable to a portfolio's exposure to risk factors.
The specifics of these functionalities are outlined in the following two sections.