Concentration risk

Diversification is a key principle in portfolio construction, yet equal-weight portfolios often fail to deliver true risk diversification. This study shows that capital-based allocation can mask strong concentration in a small number of underlying risk factors. We analyze a simple multi-asset portfolio of ten ETFs spanning equities, bonds, commodities, credit, private equity, and Bitcoin. Despite equal weights, risk is highly concentrated in a few volatile assets and amplified by strong cross-asset correlations, particularly within equity and credit markets. Risk parity reduces concentration by balancing risk contributions and improves risk-adjusted performance, though at the cost of lower returns. Further improvement is achieved through clustering-based allocation, which groups similar assets and allocates risk across more independent sources of return. The results demonstrate that effective diversification depends on the structure of risk factors rather than the number of assets or equal capital weights.

Over the past seven decades, U.S. equity-market volatility has roughly doubled—from about 10% to 20%—and this increase is concentrated at the market level and at high frequencies (daily volatility up by ~130%, weekly by ~75%, monthly by ~40%). A new paper by Lars Lochstoer and Tyler Muir argues that this structural change is not driven by macroeconomic fundamentals or firm-level shocks but by the dramatic growth of index-level trading (futures, ETFs, index mutual funds, and extended trading hours). Using statistical investigations—the 1997 introduction of E‑mini S&P 500 futures and historical NYSE trading‑hour changes—the authors provide causal evidence that easier and larger trading of the market portfolio has raised aggregate volatility through higher trading volume and a shift toward systematic demand shocks.