RISK LAB

Concentration Risk

Concentration risk is the danger created when too much of the account depends on one thing going right. It is a practical review problem because the account may appear profitable, familiar, or client-approved until the concentrated exposure moves against the user.

Meaning

What it means

Concentration risk is the loss potential created by having too much exposure tied to one company, sector, asset type, strategy, or risk factor.

Protection

What it protects

It protects against overdependence. The goal is not to eliminate conviction, but to make sure conviction does not silently become fragility.

Mechanics

How it works

The risk increases when position size grows faster than the rest of the account, when the client refuses to diversify, or when several products all react to the same event.

Risk Signals

How it shows up

Warning signs include one position dominating account value, repeated sector overlap, illiquid exposure, margin tied to concentrated holdings, or a client saying they accept risk without understanding the downside.

Action

What to do

Identify the exposure, quantify the impact of a decline, connect it to the client's objective and risk capacity, and document the review outcome.

Avoid

What to avoid

Do not rely only on client preference. A client wanting concentration does not remove the need to explain, document, and review the risk.

Risk Review Frame

Read the risk before you approve the action

Use this topic to separate a normal decision from a risk decision. A risk decision needs facts, fit, limits, and documentation before it can be treated as clean.

  • How large is the exposure?
  • What creates the concentration?
  • Can the client absorb the loss?
  • Was the risk clearly reviewed?

Topic Checklist

Before you mark this complete

  • Define the risk in plain English.
  • Identify what could go wrong for the client, account, product, or market condition.
  • Connect the risk to capacity, tolerance, time horizon, liquidity, or documentation.
  • Choose whether the situation is clean, incomplete, needs adjustment, or requires escalation.
  • Confirm the review action before moving to the next topic.

Ready Check

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