Stress testing determines the durability of a system by pushing it to its limits. In Stress Testing a network is performed by transmitting excessive numbers of packets or attempting to break in illegally. Software stress testing is done by feeding the program erroneous data as well as activating all interface options in all possible sequences. Hardware stress testing involves using the devices in extreme temperatures and hazardous environments.

Stress testing defines a scenario and uses a specific algorithm to determine the expected impact on a portfolio's return should such a scenario occur. There are three types of scenarios:

• Extreme event: hypothesize the portfolio's return given the recurrence of a historical event. Current positions and risk exposures are combined with the historical factor returns.
• Risk factor shock: shock any factor in the chosen risk model by a user-specified amount. The factor exposures remain unchanged, while the covariance matrix is used to adjust the factor returns based on their correlation with the shocked factor.
• External factor shock: instead of a risk factor, shock any index, macro-economic series (e.g., oil prices), or custom series (e.g., exchange rates). Using regression analysis, new factor returns are estimated as a result of the shock.