{"concept":{"id":82,"slug":"concentration-risk","term":"Concentration risk","shortDefinition":"The risk that arises from having too much capital in too few positions, sectors, or geographic regions, such that a single event can affect a disproportionate part of the portfolio -- reduced by diversification.","longDefinition":"Concentration risk is the risk that arises from having too much capital invested in too few positions, sectors, or geographic regions, such that a single event can affect a disproportionate part of the portfolio. It isn't a different kind of uncertainty from risk, already covered in Level 1 -- it's a specific form of risk that depends on how the portfolio as a whole is structured, not on the uncertainty of each asset considered separately: a portfolio can have high concentration risk even if no individual position, considered on its own, is especially risky. Diversification, already covered in Module 2, is precisely the practice that reduces this risk."},"relations":{"requirement":[],"contrast":[],"related":[{"concept":{"id":12,"slug":"risk","term":"Risk","shortDefinition":"Uncertainty about an investment's future outcome: the possibility that the actual result will differ from the expected one -- not merely the possibility of losing money.","longDefinition":"An investment's risk is not \"the probability of losing money\" in a strict sense, but the uncertainty about whether the actual result will match the expected one -- that result can be worse than expected, but also better. No investment is completely free of risk, not even holding cash, which carries the risk of losing purchasing power to inflation. Risk isn't uniform across asset types: it varies by issuer, term, and the nature of the instrument. It's directly tied to expected return -- see `return` -- and one way of measuring it, though not the only one, is volatility."}},{"concept":{"id":81,"slug":"diversification","term":"Diversification","shortDefinition":"Combining assets in a portfolio that don't all behave the same way in response to the same events, to reduce risk without proportionally reducing expected return -- it reduces risk, it doesn't eliminate it.","longDefinition":"Diversification is the practice of combining assets in a portfolio that don't all behave the same way in response to the same events -- when some fall, others don't fall to the same degree, or even rise -- which reduces the portfolio's overall risk without proportionally reducing its expected return. It operates within the asset allocation already decided, covered in Module 1: it spreads the capital assigned to each asset class across several specific assets, instead of concentrating it in just one. It can be applied across different dimensions -- for example, geographically and by sector -- all of them forms of the same idea. Diversification reduces risk, but doesn't eliminate it: part of the risk affects the market as a whole, and no allocation of capital within that market eliminates it completely."}},{"concept":{"id":84,"slug":"position-sizing","term":"Position sizing","shortDefinition":"The criterion for deciding how much weight a position should have in a portfolio based on how much concentration risk it introduces and how correlated it is with the rest -- a tool for controlling its contribution to risk, not a universal formula.","longDefinition":"Position sizing is the criterion for deciding how much weight a specific position should have within a portfolio, inside the asset allocation already decided in Module 1. It rests on two factors: the concentration risk a position introduces -- the greater its weight, the greater the part of the portfolio exposed to whatever happens specifically to that position -- and its correlation with the rest of the portfolio -- a position highly correlated with the others contributes more to overall risk than one with low correlation, even with the same nominal weight. It's a tool for controlling how much a specific position contributes to a portfolio's risk, not a universal formula or a fixed percentage that automatically determines how much anyone should invest in any position."}},{"concept":{"id":85,"slug":"rebalancing","term":"Rebalancing","shortDefinition":"Bringing a portfolio's actual weights back toward its target allocation when they've drifted from it -- not deciding a new allocation, but readjusting the portfolio relative to the one already decided.","longDefinition":"Rebalancing is the action of bringing a portfolio's actual weights back toward its target asset allocation, already decided in Module 1, when those weights have drifted from it -- selling part of what has grown above its target weight, buying what has fallen below, or both. It isn't deciding a new asset allocation: the target allocation stays the same, and rebalancing is the action of readjusting the portfolio relative to it, not changing it. Without rebalancing, a portfolio can drift over time toward unwanted concentration risk, already covered in Module 3, and lose part of the benefit of the diversification decided in Module 2. It involves buying and selling, which carries a transaction cost and can generate a real tax cost that must be weighed against the benefit of correcting the drift."}}],"calculatedBy":[]},"curricularPosition":[{"id":74,"moduleId":27,"slug":"what-is-concentration-risk","title":"What is concentration risk?","summary":"You understand what concentration risk is and why having too much capital in too few positions increases it.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you understand what concentration risk is and why having too much capital in too few positions increases it.\n\n## Content\n\nModule 2 explained that diversifying -- combining assets that don't all behave the same way -- reduces a portfolio's risk without proportionally reducing its expected return. This module develops the mechanisms behind that idea in more depth. This first lesson names the problem diversification solves: concentration risk.\n\nConcentration risk is the risk that arises from having too much capital invested in too few positions, sectors, or geographic regions, such that a single event can affect a disproportionate part of the portfolio. It isn't a different kind of uncertainty from risk, already covered in Level 1 -- it's a specific form of risk that depends on how the portfolio as a whole is structured, not on the uncertainty of each asset considered separately. A portfolio can have high concentration risk even if, individually, none of its positions seems especially risky: the problem isn't in each asset, but in how much combined weight a few of them carry relative to the total.\n\nConcentration can occur along more than one dimension at once -- too few positions overall, too much weight in a single sector, too much weight in a single geographic region, both already covered in Module 2 -- and all share the same underlying problem: when something specifically affects that concentration, a disproportionate part of the portfolio gets hit at once. Diversifying, already covered in Module 2, is precisely the practice that reduces this risk, spreading capital so that no specific event weighs so heavily on the whole.\n\n## Example\n\nA portfolio with 90% of its capital in a single company has very high concentration risk: a problem specific to that company -- a bad management decision, the loss of a major client -- directly affects the vast majority of the portfolio. A portfolio with that same capital spread across several companies in different sectors and regions has much lower concentration risk, even though the risk of each individual company, considered separately, is similar in both cases.\n\n## Common mistakes\n\n- Thinking having many positions already avoids concentration risk, without checking whether they all share the same sector or geographic region.\n- Confusing concentration risk with each individual asset's risk -- the problem is in how the portfolio as a whole is structured, not in the uncertainty of each position separately.\n\n## Summary\n\nConcentration risk is the risk that arises from having too much capital in too few positions, sectors, or geographic regions -- a specific form of risk derived from the portfolio's structure, not the uncertainty of each asset separately. Diversifying is the practice that reduces it.\n\n## Self-check\n\nWhy can a portfolio have high concentration risk even though none of its positions, considered separately, seems especially risky?\n\nIn what different dimensions can concentration occur within a portfolio?","bodyHtml":"<h2>Objectives</h2>\n<p>By the end of this lesson you understand what concentration risk is and why having too much capital in too few positions increases it.</p>\n<h2>Content</h2>\n<p>Module 2 explained that diversifying -- combining assets that don't all behave the same way -- reduces a portfolio's risk without proportionally reducing its expected return. This module develops the mechanisms behind that idea in more depth. This first lesson names the problem diversification solves: concentration risk.</p>\n<p>Concentration risk is the risk that arises from having too much capital invested in too few positions, sectors, or geographic regions, such that a single event can affect a disproportionate part of the portfolio. It isn't a different kind of uncertainty from risk, already covered in Level 1 -- it's a specific form of risk that depends on how the portfolio as a whole is structured, not on the uncertainty of each asset considered separately. A portfolio can have high concentration risk even if, individually, none of its positions seems especially risky: the problem isn't in each asset, but in how much combined weight a few of them carry relative to the total.</p>\n<p>Concentration can occur along more than one dimension at once -- too few positions overall, too much weight in a single sector, too much weight in a single geographic region, both already covered in Module 2 -- and all share the same underlying problem: when something specifically affects that concentration, a disproportionate part of the portfolio gets hit at once. Diversifying, already covered in Module 2, is precisely the practice that reduces this risk, spreading capital so that no specific event weighs so heavily on the whole.</p>\n<h2>Example</h2>\n<p>A portfolio with 90% of its capital in a single company has very high concentration risk: a problem specific to that company -- a bad management decision, the loss of a major client -- directly affects the vast majority of the portfolio. A portfolio with that same capital spread across several companies in different sectors and regions has much lower concentration risk, even though the risk of each individual company, considered separately, is similar in both cases.</p>\n<h2>Common mistakes</h2>\n<ul><li>Thinking having many positions already avoids concentration risk, without checking whether they all share the same sector or geographic region.</li><li>Confusing concentration risk with each individual asset's risk -- the problem is in how the portfolio as a whole is structured, not in the uncertainty of each position separately.</li></ul>\n<h2>Summary</h2>\n<p>Concentration risk is the risk that arises from having too much capital in too few positions, sectors, or geographic regions -- a specific form of risk derived from the portfolio's structure, not the uncertainty of each asset separately. Diversifying is the practice that reduces it.</p>\n<h2>Self-check</h2>\n<p>Why can a portfolio have high concentration risk even though none of its positions, considered separately, seems especially risky?</p>\n<p>In what different dimensions can concentration occur within a portfolio?</p>","sortOrder":1,"readingMinutes":7,"difficulty":"Intermedio","url":"/en/academy/portfolio-management/risk-management/what-is-concentration-risk"},{"id":83,"moduleId":30,"slug":"how-do-you-build-an-investment-portfolio-step-by-step","title":"How do you build an investment portfolio, step by step?","summary":"You know how to combine the asset allocation, diversification, and risk management already covered in this level to build a real investment portfolio, step by step.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you know how to combine the asset allocation, diversification, and risk management already covered in this level to build a real investment portfolio, step by step.\n\n## Content\n\nThis level's five previous modules introduced, one by one, the criteria that make up a coherent portfolio: asset allocation based on risk profile and time horizon, diversification, managing concentration risk and correlation, rebalancing, and investor taxation. This lesson doesn't add any new criterion -- it brings together the ones already covered into a practical sequence.\n\nThe starting point is always the same: asset allocation, already covered in Module 1, decided from the investor's risk profile and time horizon. That allocation sets, in general terms, what proportion of the portfolio would correspond to each asset class -- stocks, bonds, ETFs, investment funds, commodities, or currencies, all already covered in Level 1 -- before choosing any specific instrument.\n\nOnce the allocation is set, the next step is diversifying within each asset class and across them, already covered in Module 2: combining assets that don't all behave the same way reduces the portfolio's risk without proportionally reducing expected return. Diversifying isn't simply adding up different instruments -- it's watching, as Module 3 showed, that no position concentrates a disproportionate risk, taking into account how the chosen positions relate to each other.\n\nSizing each position, also covered in Module 3, is what translates the allocation and diversification into concrete numbers: how much weight each position gets within the portfolio, consistent with its contribution to overall risk, not just with the investor's conviction in that specific idea.\n\nFinally, building a portfolio doesn't end at the moment of purchase. The tax cost of trades -- already covered in Module 5 -- and the future need to rebalance -- already covered in Module 4 -- are part of the criteria from the start, not an afterthought: a well-built portfolio anticipates that it will need to be reviewed over time, a topic the next lesson develops.\n\n## Example\n\nAn investor with a long time horizon and a risk profile that tolerates swings decides, based on their asset allocation, to put most of the portfolio into stocks and a smaller part into bonds. Within the stock portion, they diversify across several companies and sectors instead of concentrating the investment in just one; within the bond portion, they do the same across several issuers. Position weights have been set accounting for their contribution to concentration risk and how they relate to the rest of the positions.\n\n## Common mistakes\n\n- Choosing the specific instruments first and deciding the asset allocation afterward, instead of the other way around -- the allocation should precede the selection, not follow it.\n- Confusing \"diversifying\" with \"accumulating many different instruments\" without watching the real correlation between them.\n- Building the portfolio without considering from the start that it will have a tax cost and will need rebalancing -- treating both as a later surprise instead of a design criterion.\n\n## Summary\n\nBuilding a real portfolio means applying, in sequence, the criteria already covered in this level: asset allocation based on risk profile and time horizon, diversification within and across asset classes, sizing each position based on its contribution to overall risk, and anticipating the tax cost and the future need to rebalance.\n\n## Self-check\n\nWhy should asset allocation be decided before choosing the specific instruments that will make up the portfolio?\n\nWhy isn't diversifying the same as simply accumulating different instruments?","bodyHtml":"<h2>Objectives</h2>\n<p>By the end of this lesson you know how to combine the asset allocation, diversification, and risk management already covered in this level to build a real investment portfolio, step by step.</p>\n<h2>Content</h2>\n<p>This level's five previous modules introduced, one by one, the criteria that make up a coherent portfolio: asset allocation based on risk profile and time horizon, diversification, managing concentration risk and correlation, rebalancing, and investor taxation. This lesson doesn't add any new criterion -- it brings together the ones already covered into a practical sequence.</p>\n<p>The starting point is always the same: asset allocation, already covered in Module 1, decided from the investor's risk profile and time horizon. That allocation sets, in general terms, what proportion of the portfolio would correspond to each asset class -- stocks, bonds, ETFs, investment funds, commodities, or currencies, all already covered in Level 1 -- before choosing any specific instrument.</p>\n<p>Once the allocation is set, the next step is diversifying within each asset class and across them, already covered in Module 2: combining assets that don't all behave the same way reduces the portfolio's risk without proportionally reducing expected return. Diversifying isn't simply adding up different instruments -- it's watching, as Module 3 showed, that no position concentrates a disproportionate risk, taking into account how the chosen positions relate to each other.</p>\n<p>Sizing each position, also covered in Module 3, is what translates the allocation and diversification into concrete numbers: how much weight each position gets within the portfolio, consistent with its contribution to overall risk, not just with the investor's conviction in that specific idea.</p>\n<p>Finally, building a portfolio doesn't end at the moment of purchase. The tax cost of trades -- already covered in Module 5 -- and the future need to rebalance -- already covered in Module 4 -- are part of the criteria from the start, not an afterthought: a well-built portfolio anticipates that it will need to be reviewed over time, a topic the next lesson develops.</p>\n<h2>Example</h2>\n<p>An investor with a long time horizon and a risk profile that tolerates swings decides, based on their asset allocation, to put most of the portfolio into stocks and a smaller part into bonds. Within the stock portion, they diversify across several companies and sectors instead of concentrating the investment in just one; within the bond portion, they do the same across several issuers. Position weights have been set accounting for their contribution to concentration risk and how they relate to the rest of the positions.</p>\n<h2>Common mistakes</h2>\n<ul><li>Choosing the specific instruments first and deciding the asset allocation afterward, instead of the other way around -- the allocation should precede the selection, not follow it.</li><li>Confusing &quot;diversifying&quot; with &quot;accumulating many different instruments&quot; without watching the real correlation between them.</li><li>Building the portfolio without considering from the start that it will have a tax cost and will need rebalancing -- treating both as a later surprise instead of a design criterion.</li></ul>\n<h2>Summary</h2>\n<p>Building a real portfolio means applying, in sequence, the criteria already covered in this level: asset allocation based on risk profile and time horizon, diversification within and across asset classes, sizing each position based on its contribution to overall risk, and anticipating the tax cost and the future need to rebalance.</p>\n<h2>Self-check</h2>\n<p>Why should asset allocation be decided before choosing the specific instruments that will make up the portfolio?</p>\n<p>Why isn't diversifying the same as simply accumulating different instruments?</p>","sortOrder":1,"readingMinutes":7,"difficulty":"Intermedio","url":"/en/academy/portfolio-management/building-a-portfolio/how-do-you-build-an-investment-portfolio-step-by-step"}],"graphSummary":{"root":{"type":"concept","id":"82","depthFromRoot":0,"entity":{"type":"concept","slug":"riesgo-de-concentracion","term":"Riesgo de concentración","excerpt":"Riesgo que surge de tener demasiado capital en muy pocas posiciones, sectores o zonas geográficas, de modo que un solo evento puede afectar a una parte desproporcionada de la cartera -- reducido por la diversificación."}},"depth":1,"returnedNodes":1,"truncated":false,"hasCycle":false,"nodes":[{"type":"concept","id":"82","depthFromRoot":0,"entity":{"type":"concept","slug":"riesgo-de-concentracion","term":"Riesgo de concentración","excerpt":"Riesgo que surge de tener demasiado capital en muy pocas posiciones, sectores o zonas geográficas, de modo que un solo evento puede afectar a una parte desproporcionada de la cartera -- reducido por la diversificación."}}],"edges":[]},"relatedNews":[],"relatedEntities":[]}