Definition
Concentration risk arises when a portfolio is heavily weighted toward a single position, sector, geography, or risk factor. A 30% allocation to one stock means a 50% decline in that stock creates a 15% portfolio loss. Risk management practices typically set position limits (5% max), sector limits (25% max), and factor exposure limits to prevent excessive concentration.
lightbulb Example
An investor holds 40% in one tech stock that drops 60%. Portfolio loss = 24% from that single position alone. Proper diversification with 5% maximum position size would have limited the impact to 3%.
verified_user Key Points
- Overexposure to single security, sector, or factor
- Position limits typically 5% max per security
- Sector limits typically 20-25% max
- Hidden concentration through correlated positions