What generally increases when investing in a concentrated stock holding?

What generally increases when investing in a concentrated stock holding?

• A. Return on investment certainty
• B. Portfolio risk
• C. Market volume
• D. Investment liquidity

Answer: (B)

Investing in a concentrated stock holding typically results in increased portfolio risk. This occurs because concentrated holdings involve having a large proportion of the portfolio invested in a limited number of stocks or a single stock, which exposes the investor to company-specific risks. These risks include the potential for significant loss if the performance of one or a few companies deteriorates, compared to a well-diversified portfolio where the impact of any single stock's poor performance is mitigated by the presence of multiple other investments. A highly concentrated portfolio lacks diversification benefits, which can help cushion against market volatility and downturns. Therefore, as the concentration increases, so does the exposure to adverse events affecting those specific holdings, leading to a higher overall risk profile for the portfolio. The other options do not align with typical outcomes of concentrated stock holdings. Investment liquidity generally remains unchanged regardless of concentration and market volume relates more to trading activity than to the risk profile of the portfolio. Additionally, return on investment certainty is typically reduced with concentration, as fewer securities mean greater sensitivity to the performance of those specific investments.

Investing in a concentrated stock holding typically results in increased portfolio risk. This occurs because concentrated holdings involve having a large proportion of the portfolio invested in a limited number of stocks or a single stock, which exposes the investor to company-specific risks. These risks include the potential for significant loss if the performance of one or a few companies deteriorates, compared to a well-diversified portfolio where the impact of any single stock's poor performance is mitigated by the presence of multiple other investments.

A highly concentrated portfolio lacks diversification benefits, which can help cushion against market volatility and downturns. Therefore, as the concentration increases, so does the exposure to adverse events affecting those specific holdings, leading to a higher overall risk profile for the portfolio.

The other options do not align with typical outcomes of concentrated stock holdings. Investment liquidity generally remains unchanged regardless of concentration and market volume relates more to trading activity than to the risk profile of the portfolio. Additionally, return on investment certainty is typically reduced with concentration, as fewer securities mean greater sensitivity to the performance of those specific investments.