Concentration Risk
The exposure created when a large share of a portfolio sits in one holding, sector or risk factor.
Formula
Test: the largest position, sector or factor exposure is large enough that a normal adverse outcome in it would materially damage the portfolio
Unit
%
In depth
Concentration is invisible in a count of holdings and visible only in weights: twenty stocks with one at 40% is a concentrated portfolio. It also hides in factor exposure, so a portfolio of twelve different banks is one bet on credit conditions regardless of how many names it contains. Employees holding their employer's stock face a particular version, since job and portfolio depend on the same company failing or not. Concentration is the price of conviction and can be rational, but it must be a decision rather than an accident of drift.
Worked example
A 35% position falling 60% costs the portfolio 21%. The same stock at 4% costs 2.4%. Whether the analysis was right or wrong, only the weight decided how much the answer mattered.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Concentration Risk” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.