Concentration risk
Definition · Level 8 · Risk & portfolio
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Having too much riding on one name, sector, factor or counterparty, so a single event can do outsized damage. Controlled with hard limits, e.g. at most 5% of equity per name.
Example
30% of the fund in one biotech: a −60% day on a failed trial costs the whole fund 18%.
Where Tradecraft teaches it
Level 8 · Risk & portfolio, in the lesson “Exposure, leverage & liquidity”: Gross vs net, leverage, beta-adjusted exposure, beta hedging with futures, concentration and days to liquidate.
Related terms
- Beta hedgeShorting index futures or an index ETF with notional = portfolio value × β to neutralize (estimated) market exposure; stock-specific risk stays on.
- Beta-adjusted exposureEach position’s dollar value times its beta, summed — the book’s estimated market sensitivity in index-equivalent dollars.
- Days to liquidatePosition size divided by the volume you can trade per day without moving the price (often 10–25% of ADV).
- Gross exposureLong market value plus the absolute value of short market value; total capital at work.
- Liquidity riskThe danger that a position can’t be exited (or funded) quickly without a big price concession — spreads widen and depth vanishes exactly in stress.
- Net exposureLong market value minus short market value; the book’s directional tilt.