Scenario P&L

Scenario P&L

Scenario P&L measures how a portfolio's dollar profit or loss changes under a hypothetical market move. Unlike stress testing with absolute position values, here we use portfolio weights and apply uniform shocks relative to total portfolio value.

Formula

P&L = portfolio_value × Σ(w_i × shock_i)

Where w_i are the allocation weights (summing to 1) and shock_i are percentage changes for each asset.

Interpretation

• Positive P&L → the scenario is favorable
• Negative P&L → the scenario causes a loss
• Magnitude shows dollar risk from the scenario

Example

portfolio_value = 1,000,000 weights = [0.5, 0.5] shocks = [−10%, +5%] P&L = 1,000,000 × (0.5×(−0.10) + 0.5×0.05) = 1,000,000 × (−0.05 + 0.025) = 1,000,000 × (−0.025) = **−25,000**