Methodology · Stress testing
Stress testing and the Portfolio Durability Test
The Portfolio Durability Test shows how a client's current portfolio and the proposed Quantum strategy would behave through three crisis scenarios, holding by holding, and how long the Quantum strategy would take to recover. It is a deterministic scenario test: the same holdings and the same scenario always produce the same result, and the shock and recovery-year parameters the test applied are shown in the product beside the result.
In industry terms, the Portfolio Durability Test is scenario-based historical stress testing: each scenario is a shock calibrated to a historical crisis, applied to every holding according to its contractual mechanics, followed by a modeled recovery path.
The three scenarios
Quantum models three scenarios: a severe recession calibrated to 2008, a moderate bear market calibrated to 2022, and a flash crash calibrated to 2020. Each scenario is a fixed set of parameters — an equity peak-to-trough decline, a bond shock, a duration, a year-by-year recovery profile, a dividend-elasticity factor, a cash yield, and a structured-note underlying shock. The shock is applied once, at the start; recovery then compounds forward along the scenario's profile.
Not a prediction. Quantum does not predict that this scenario will occur. It shows how the portfolio is designed to behave if the scenario occurs.
How each holding is shocked
For the proposed Quantum strategy, the test is built from the client's five-bucket balances and the products the advisor has attached to each bucket. Each product record carries a stress classification that decides how the scenario reaches it:
- Cash and cash equivalents take no market loss.
- Contractually principal-protected products lose only the unprotected share of the shock.
- Structured notes are valued through a dedicated payoff model that walks the note's observation path against its barrier or buffer, distinguishing notes held to maturity from those valued at the trough.
- Buffered products absorb the shock up to their buffer and participate beyond it.
- Equity holdings scale the scenario's equity decline by the product's downside beta.
- Bond holdings scale the scenario's equity decline by duration.
- Balanced allocations blend the equity and bond legs.
The client's current portfolio is stressed from the asset-class allocation the advisor enters — equities, bonds, high-yield, and annuities. Household guaranteed income (Social Security, pensions, other guaranteed income) is shown alongside and is never shocked.
Before any headline is shown, the engine reconciles every holding's dollars back to the pre-crisis total to the cent, and displays a headline only when that sum conserves.
Income, dividends, and recovery
Dividends continue through a scenario, reduced in proportion to the equity shock by the scenario's dividend-elasticity factor; a holding the advisor flags as non-dividend-paying contributes nothing. Bond coupons, structured-note conditional coupons, annuity rider withdrawals, and cash interest are modeled as one year of income during stress. Contractual credited interest on protected annuities accrues as a separate accumulation line and is never counted as income.
Recovery is modeled year by year for five years, with each holding's recovery rate capped by its contractual mechanics — a fixed indexed annuity by its credited or cap rate, an income annuity at zero growth, a structured note or buffered product by its cap, a bond by its duration. Each holding compounds along its own path, and the test reports the year the strategy returns to its pre-crisis value together with a ten-year outlook.
What the headline measures
Headline basis: the durability headline shows two percentages side by side — the principal-only mark-to-market drawdown (a fact at the moment of the shock) and the net 1-year economic result (that drawdown offset by the income and gains the portfolio produces over the following year). Both are measured against the same classified balance, so they are directly comparable, and the net is never folded into the drawdown. One-year income is a forecast and is labeled as such. The principal-drawdown basis applies to Current, Quantum, and the 60/40 reference; the net economic percentage is shown for the Quantum strategy.
60/40 reference basis: the equity leg uses the peak-to-trough drawdown — the same lens applied to the Current and Quantum portfolios — because drawdown is what a durability test measures. The end-of-period calendar return is shown alongside as labeled context. The 60/40 reference is a blend (60% S&P 500 + 40% Bloomberg US Aggregate Bond), not an investable index.
The result is the two percentages above and a recovery label: the year and month the strategy returns to its pre-crisis value, a note that it never fell below that value, or a ten-plus-year mark.
Comparison structure
For each scenario the test reports three principal-drawdown figures on the same basis — the current portfolio, the Quantum strategy, and the 60/40 reference — and a five-year recovery for the current and Quantum portfolios. For the Quantum strategy, a four-line economic decomposition (principal impact, one-year income, credited return, and net) is built from product-level contract terms.
When client context is available, two further layers attach: an income-adequacy read that checks five years of Social Security, pension, and RMD income against the client's draw target and flags an unsustainable withdrawal rate, and a tax-drag read that prices federal, state, and IRMAA taxes over the recovery years with the same tax engine used everywhere else in Quantum.
Assumptions
| Assumption | What Quantum does |
|---|---|
| Scenarios | Three scenario parameter sets calibrated to the 2008, 2022, and 2020 crises; the shock is applied once and recovery compounds along the scenario's profile |
| Recovery horizon | Five modeled years and a ten-year outlook |
| Income during stress | One year of dividends, coupons, rider withdrawals, and cash interest |
| Benchmark | 60/40 reference blend, compared on the same peak-to-trough drawdown basis as the client and Quantum portfolios |
| Determinism | The same holdings and the same scenario always produce the same result; the applied shock and recovery-year parameters are shown beside the result |
Questions advisors ask about the durability test
- Which historical crises does the durability test use?
- Three scenarios calibrated to the 2008 recession, the 2022 bear market, and the 2020 flash crash. Each is a fixed set of shock and recovery parameters; the headline shock and recovery-year values the engine applied are displayed in the product with each result, and the full parameter set is described on this page.
- Is the durability test deterministic?
- Yes. The same holdings and the same scenario always produce the same result, and the shock and recovery-year parameters the test applied are shown in the product beside each result.
- How are structured notes stress-tested?
- Through a dedicated payoff model that walks the note's observation path against its barrier or buffer, distinguishing notes held to maturity from those valued at the trough, and paying the conditional coupon for each observation date the underlying holds at or above the coupon barrier.
- What is the 60/40 reference?
- A blend of 60% S&P 500 and 40% Bloomberg US Aggregate Bond, compared on the same peak-to-trough drawdown basis as the client and Quantum portfolios.
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