Risk across the whole book
A single trade's risk is only half the story; what can actually ruin you is how your positions move together. These pages cover portfolio-level risk — how diversification and low correlation reduce it, how concentration and sector bets concentrate it, how position limits, capital allocation and margin management contain it, and how liquidity, tail risk and black-swan events break the models exactly when it matters. This is where risk management stops being about one trade and starts being about survival of the whole account.
Portfolio Risk: Portfolio risk is the total risk of all positions held together, which can be far larger or smaller than the sum of individual risks depending on how the positions are correlated. It is reduced by genuine diversification across uncorrelated exposures and controlled by position and sector limits, disciplined capital allocation and margin management. Its most dangerous forms — concentration, liquidity, tail and black-swan risk — appear precisely when correlations converge toward one in a crisis, which is why portfolio risk is managed with hard limits and stress tests rather than models alone.
Diversification
Portfolio riskDiversification is the practice of spreading capital across positions that do not move perfectly together, so that the volatility of the whole portfo…
Correlation Risk
Portfolio riskCorrelation risk is the danger that positions assumed to be independent actually move together, so their combined loss is far larger than expected, a…
Concentration Risk
Portfolio riskConcentration risk is the exposure that arises when too large a share of capital or risk sits in a single position, sector or common driver, so that …
Sector Risk
Portfolio riskSector risk is the component of a position's risk driven by the fortunes of its whole industry, so that stocks within a sector move together and a bo…
Position Limits
Portfolio riskPosition limits are pre-set caps on how much capital, risk or exposure any single position may take, ensuring that no individual trade, however convi…
Capital Allocation
Portfolio riskCapital allocation is the decision of how to divide an account across positions, strategies and cash, and done well it distributes risk rather than r…
Margin Management
Portfolio riskMargin management is the discipline of controlling how much of your available margin is committed, so that rising margin requirements from volatility…
Liquidity Risk
Portfolio riskLiquidity risk is the danger that a position cannot be exited at or near its fair price when needed, because there are too few willing counterparties…
Tail Risk
Portfolio riskTail risk is the risk of rare, extreme outcomes in the far tail of the return distribution, losses much larger than a normal model predicts, which ca…
Black Swan Events
Portfolio riskA black swan is a rare, extreme, high-impact event that lies outside normal expectations and is only rationalised as predictable in hindsight, so it …