Riskalyze makes it easy to communicate with clients the risks associated with holding a highly concentrated position. Two distinct approaches are outlined below.
In starting, let's look at a portfolio with a heavy allocation to General Motors (GM):
"Very Bad News Day" Scenario
Highly concentrated positions make an account more sensitive to isolated volatility, such as when there's a day of "Very Bad News" for the security in question. The catalyst for an energy stock may be an oil spill, for a bank another 2008 financial crisis, or for other stocks it could be a scandal. There are a couple of ways to show your client what a "very bad news day" might mean for their portfolio. The primary way to display this scenario is to use Portfolio Stress Tests. From the desired portfolio, click into Stress Tests:
When you click Stress Tests, you'll be able to see how the portfolio would fare through a Financial Crisis scenario and a 2008 Bear Market scenario as shown below.
Additionally, you can create a custom scenario that demonstrates the effects of a specific previous market environment on the portfolio. More information about how to do this in our How to Use Scenarios knowledge base article.
The second approach to demonstrating the risks involved with a highly concentrated position is to model sideways movement or stagnation for the specific position. Advisors can override the return expectation and/or dividend to 0% by clicking on the position and editing the scenario as displayed below. Riskalyze empowers advisors to edit these inputs for edge cases with this technique while highlighting your Riskalyze knowledge and industry expertise! You can simultaneously explain and show why diversification, and the impact of highly concentrated positions, matters using Riskalyze.