Risk
The risk that arises when single holdings, sectors, countries or currencies are weighted too heavily in a portfolio. It raises volatility and potential loss; the remedy is diversification.
Concentration risk, or Klumpenrisiko, describes the danger that arises when a portfolio depends too heavily on a few positions. That can be a single holding, but equally a sector, a region or a currency.
The higher the weighting of a single factor, the more strongly its performance feeds through to the overall result. As a rule this raises both the volatility of the portfolio and the potential loss if that particular area comes under pressure.
The remedy is diversification, the deliberate spreading across many holdings, sectors, countries and currencies. Concentration risk often builds up unnoticed, for instance when several funds contain the same large stocks or a high share sits in the home region.
Related terms
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