Concentration Risk
The risk of amplified losses from overexposure to a single asset, issuer, sector, geography, or counterparty.
What is Concentration Risk?
Concentration risk arises when a portfolio, bank, or financial institution has an outsized exposure to a single asset, issuer, industry sector, geographic region, or counterparty — such that an adverse event affecting that one source of exposure can cause a disproportionately large loss. In portfolio management, concentration risk is the opposite of diversification: holding 80% of a portfolio in a single stock or sector means that a company-specific event can devastate returns regardless of broader market conditions. In banking, concentration risk applies to loan books — a bank heavily exposed to one industry or borrower faces systemic risk if that segment deteriorates. Regulatory frameworks such as Basel III impose limits on concentration in banking. Common metrics for measuring concentration include the Herfindahl-Hirschman Index (HHI) and portfolio weight analysis. The solution is diversification: spreading capital across uncorrelated assets, sectors, and geographies.
Example
An investor holds 60% of their portfolio in a single technology stock. When that company reports an earnings miss and the stock drops 35%, the investor's total portfolio loses 21% in a single day. A broadly diversified portfolio holding 50 stocks across sectors with a 2% maximum individual weight would have limited the same event to a 0.7% portfolio impact.