Windham’s Scenario Lab is a new analytical platform that enables investors to evaluate and stress test portfolios based on a solid scientific foundation that eliminates the biases and guesswork associated with conventional approaches to scenario analysis.
It relies on a powerful statistic called the Mahalanobis distance to determine the likelihood of prospective economic scenarios. This statistic was originally derived in the early 20th century by an Indian mathematician to analyze human skulls, and it has since been applied to measure turbulence in the financial markets, diagnose diseases, detect anomalies in self-driving vehicles, and construct an index of the business cycle.
Scenario Lab supports all the steps of scenario analysis.
Generates pre-defined or customized economic scenarios
Assigns probabilities to economic scenarios by measuring their statistical similarity to current economic conditions or average economic conditions for a chosen history
Shows how to modify scenario specifications to reconcile empirically driven scenario probabilities with an investors' subjective views
Maps prospective economic scenarios onto asset class returns
Generates a variety of portfolio metrics for determining the most suitable portfolio
Replaces guesswork of assigning probabilities to prospective scenarios with a mathematically rigorous algorithm for measuring statistical similarity
Enables investors to evaluate portfolio risk and return