Concentration risk

Diversification is one of the cornerstones of risk management. Just as professional
gamblers limit their stakes on any one hand to a small fraction of their net worth, so
they will not be ruined by a run of bad luck, so professional risk-taking enterprises
must limit the concentration of their exposures to prevent any one event having a
significant impact on their capital base. Concentrations may arise in a particular
market, industry, region, tenor or trading strategy.
Unfortunately, there is a natural tension between pursuit of an institution’s core
competencies and comparative advantages into profitable market segments or niches,
which produces concentration, and the desire for diversification of revenues and
exposures.