Tail Risk Stress Tester - VaR and expected shortfall practice
What is the portfolio’s daily volatility?
Three assets, the correlation matrix on the left. Answer in percent.
Your loss gets worse three separate times without a single asset becoming more volatile - once from correlations converging, once from measuring the tail instead of its edge, and once from admitting returns are not normal.
All three are model risk, not market risk.
About Tail Risk Stress Tester
Run a $100M multi-asset book through a correlation breakdown, then compute the Expected Shortfall that VaR leaves out.
You manage a $100M book with three positions: 50% in an equity index (daily vol 1.2%), 30% in high-yield credit (0.8%), and 20% in exotic derivatives (2.5%). The game runs in four phases. In phase 1 the regime is calm and you compute the portfolio's daily volatility from the given correlation matrix (equity-credit 0.35, equity-derivatives 0.55, credit-derivatives 0.20), entering your answer as a percentage.
In phase 2 the regime flips to stress: every off-diagonal correlation goes to 1.00 while the individual asset vols are unchanged, and you compute the new portfolio volatility. In phase 3 you compute the 99% Expected Shortfall of the stressed book in dollar millions. In phase 4 the game shows what a fat-tailed (Student-t with 4 degrees of freedom) refit does to ES and asks you to pick one of four responses to the situation.
Numeric answers are checked against a tolerance: 0.06 percentage points of volatility for the two vol questions and $0.25M for the ES question. Each question locks after one check, so there are no retries within a run - you can restart the whole stress test at the end.
Why quant interviews test this
"What is wrong with VaR?" is asked in essentially every risk interview, and the strong answer is the one this game trains: VaR is silent about everything past its own threshold, and it is not subadditive, so it can be gamed by splitting books. Follow up with why Basel moved to a 97.5% ES and you are ahead of most candidates.
The correlation-breakdown computation is also a live interview exercise: given weights, vols, and a correlation matrix, compute portfolio vol, then recompute at rho = 1. Interviewers use it to check both the double-sum mechanics and whether you know that diversification depends on the correlation structure. The fat-tail phase maps to the standard follow-up about why normal-based risk numbers understate crises.
The Tail Risk Stress Tester guide covers how scoring works, the strategy that wins, a worked example and the mistakes most players make.