The risk from having large exposure to one name, sector, region or risk factor. A single event can then cause a disproportionate loss.
Where you will meet it
Concentration risk comes up in 38 learning outcome notes across the FRM syllabus.
A few of them:
Central Clearing FRM Part I · Financial markets and products
“Exam point: the main trade-off is lower contagion against greater concentration and liquidity demand.”
How Do Firms Manage Financial Risk? FRM Part I · Foundations of risk management
“They include position or notional limits, sensitivity limits such as DV01, VaR limits, concentration limits, and stop-loss limits that trigger review after cumulative losses.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
“Concentration risk arises when exposures share a borrower, sector or region.”
Advances in Artificial Intelligence: Implications for Capital Markets Activities FRM Part II · Current issues in financial markets
“The first is third-party dependencies and concentration, since a few providers of cloud services, data and foundation models serve many institutions and a failure at one hits all of them.”
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