What does stress testing primarily assess in a financial model?

Stress testing primarily assesses investment resilience to adverse conditions, making it an essential tool for understanding how various scenarios—particularly negative economic developments—can affect the performance of a financial model. This process involves simulating different unfavorable situations such as economic downturns, interest rate increases, changes in market conditions, and other stressors to evaluate how the investment or financial model would respond under such pressures.

By examining these resilience metrics, investors and analysts can identify potential vulnerabilities within their portfolios or financial plans and take preemptive measures to mitigate risk. This focuses specifically on the capacity of an investment to withstand challenges rather than merely evaluating its performance in stable or normal situations, its long-term growth potential, or its standings in the market.