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What you will learn
- Distinguish concentration from the number of holdings.
- Calculate how one holding's decline affects the total.
- Explain why different companies can share a risk.
A company problem and a shared event are different risks
A fictional factory might face a production stoppage affecting that business. Another event might affect several businesses at once. In a classroom exercise, distinguish an event specific to one company from a scenario involving both companies.
Finansinspektionen discusses spreading exposure between companies, industries and markets. Different names do not automatically mean independent risks. Ask what the companies sell, who their customers are and which assumptions apply to more than one holding.
The same decline has different effects under different allocations
Two fictional portfolios both start at SEK 10,000. One has SEK 8,000 in Company A and SEK 2,000 in B. The other has SEK 5,000 in each. These are calculation cases, not suggested investments.
Suppose A falls 25 percent and B stays unchanged. A loses SEK 2,000 in the first portfolio and SEK 1,250 in the second. The difference comes from how much of the starting value depended on A.
If the table does not fit, scroll it sideways.
| Starting allocation | Value afterwards | Total change |
|---|---|---|
| A SEK 8,000; B SEK 2,000 | 6,000 + 2,000 = SEK 8,000 | −20 % |
| A SEK 5,000; B SEK 5,000 | 3,750 + 5,000 = SEK 8,750 | −12.5 % |
What happens when both holdings fall?
Change the scenario so that both A and B fall 25 percent. The first portfolio becomes 6,000 + 1,500 = SEK 7,500. The second becomes 3,750 + 3,750 = SEK 7,500. Both now fall 25 percent.
This shows why the first comparison does not prove that the more even portfolio always protects against a large drop. The result depends on the changes we assumed. Spreading exposure between parts that move together can offer less protection in a shared scenario.
A simulation lets you explore assumptions, but a selected calculation case is not a forecast. A reasonable conclusion should state both what the example shows and which situations it does not address.
A simple way to investigate concentration
Begin with a table of values and weights. Write one possible event affecting only one part and another affecting several. Explain the assumptions using information about the businesses, rather than choosing an event only to obtain a particular answer.
The number of companies is one part of the description. If 95 percent sits in one company and the rest in several small holdings, the total still depends heavily on the large part. If every holding is in the same industry, there is another type of concentration to discuss.
- Which part has the largest weight?
- Which holdings share an imagined risk?
- How does one decline affect the total?
- What happens if several fall at once?
- What information is missing from the scenario?
Try it yourself
A fictional account has 40 percent in A and 60 percent in B. A falls 10 percent while B stays unchanged. How does total value change?
Show the solution and explanation
It falls 4 percent.
A represents 40 percent of the total: 0.40 × −10 % = −4 %. Starting with SEK 10,000, A is worth SEK 4,000 and loses SEK 400. The total becomes SEK 9,600 if everything else stays unchanged and no money is added.
Check your understanding
Do several different shares remove the risk of loss?
No. Several holdings can be affected at the same time, and total portfolio value can still fall.
Why is counting companies not enough?
You also need the allocation of value and the risks those companies share. Many small parts do not automatically remove dependence on one very large part.
Practise with virtual money
Try what you just learned in a practice portfolio with virtual money. You don't deposit any real money.
How the practice portfolio worksKeep learning and practising
More lessons on this topic
Start here: shares and portfolios
Sources and examples
- Finansinspektionen: shares, risk and checking sources (in Swedish)
- Handelsbanken: portfolios and different types of risk (in Swedish)
The sources support the factual explanations. Calculations and exercises were created for this lesson. Amounts and price changes are invented unless stated otherwise.
This material is educational and does not recommend securities to buy. A simulated result does not guarantee a future result.
