Managing risk on individual trades is essential, but understanding your total portfolio risk is equally important. A portfolio risk assessment examines your overall exposure across all positions, helping you identify hidden risks and optimize your risk allocation.
What is Portfolio Risk Assessment?
Portfolio risk assessment is the process of evaluating your total exposure across all positions. It considers not just individual position risk, but how those positions interact and contribute to overall portfolio volatility.
Key Question: If everything goes wrong at the same time, what happens to your account?
Key Portfolio Risk Metrics
1. Total Open Risk
The sum of risk across all open positions, calculated using stop losses.
Formula:
Total Open Risk = Sum of (Position Size x Distance to Stop Loss)
Example:
- Position A: 100 shares, $5 to stop = $500 risk
- Position B: 50 shares, $10 to stop = $500 risk
- Position C: 200 shares, $3 to stop = $600 risk
- Total Open Risk: $1,600
2. Total Open Risk Percentage
Your total open risk as a percentage of account value.
Using the example above with a $50,000 account:
$1,600 / $50,000 = 3.2% total portfolio risk
3. Gross Exposure
Total value of all positions (long + short) divided by account value.
Example:
- $30,000 in long positions
- $10,000 in short positions
- Account value: $50,000
- Gross Exposure: ($30,000 + $10,000) / $50,000 = 80%
4. Net Exposure
Long positions minus short positions, divided by account value.
Using above example:
Net Exposure: ($30,000 - $10,000) / $50,000 = 40% net long
Sector and Industry Exposure
Concentration in specific sectors amplifies risk. Track your exposure by sector:
| Sector | Exposure | Recommendation |
|---|---|---|
| Technology | 45% | Consider reducing (over-concentrated) |
| Healthcare | 20% | Acceptable |
| Financial | 15% | Acceptable |
| Consumer | 10% | Acceptable |
Guideline: No single sector should exceed 25-30% of your portfolio unless you are intentionally making a concentrated bet.
Position Size Distribution
Examine how your capital is distributed across positions:
- Largest position: Should not exceed 10-15% of account (unless intentional)
- Average position: Typically 3-5% of account for diversified portfolios
- Smallest positions: If below 1%, consider whether they are worth monitoring
Example Analysis
$50,000 account with 8 positions:
- Position 1: $12,000 (24%) - Too concentrated
- Position 2: $8,000 (16%) - Borderline high
- Position 3: $7,000 (14%) - Acceptable
- Positions 4-8: $4,600 each (9.2%) - Well-sized
Correlation Risk Assessment
Positions that move together multiply risk. Assess correlation:
High Correlation Examples
- Multiple tech stocks (AAPL, MSFT, GOOGL)
- Bank stocks during financial stress
- Commodity-related stocks (oil companies, miners)
- Growth stocks during rate hike environments
Low Correlation Examples
- Utilities vs. technology
- Domestic vs. international
- Long stocks vs. VIX calls (volatility hedge)
- Different trading strategies (momentum vs. mean reversion)
Visualize Your Portfolio Risk
Pro Trader Dashboard provides real-time portfolio risk metrics, sector exposure charts, and correlation analysis.
Stress Testing Your Portfolio
Ask "what if" questions to understand worst-case scenarios:
Scenario Analysis
- Market crash (20% down): What would your portfolio lose?
- Sector rotation: What if tech drops 30% but others are flat?
- Volatility spike: How do your options positions respond to VIX doubling?
- All stops hit: If every position hits its stop loss, what is the total damage?
Maximum Adverse Excursion
Calculate the worst-case scenario where all positions move to their stops simultaneously:
Example:
- 5 positions each risking 1.5% = 7.5% maximum portfolio risk
- If all stops hit simultaneously, you lose 7.5%
Is this acceptable? For most traders, keeping maximum simultaneous risk under 10% is prudent.
Daily Portfolio Risk Review
Perform this check daily or before adding new positions:
- Total open risk: Is it within your maximum (e.g., 6%)?
- Largest position: Is any position too dominant?
- Sector concentration: Are you overweight any sector?
- Correlation check: How many positions would move together in a downturn?
- Pending catalysts: Are any positions facing earnings or other events?
Risk Budget Allocation
Allocate your risk budget strategically:
Example Risk Budget (6% total):
- Core positions (high conviction): 3% combined
- Swing trades: 2% combined
- Speculative/experimental: 1% combined
This ensures your best ideas get meaningful allocation while limiting damage from speculative trades.
Rebalancing Based on Risk
As positions move, your risk profile changes. Consider rebalancing when:
- A position grows to dominate the portfolio (take profits)
- Sector exposure becomes unbalanced
- Total risk exceeds your maximum
- Correlation has increased (market regime change)
Portfolio Risk Limits
Set hard limits for portfolio-level risk:
| Metric | Conservative | Moderate |
|---|---|---|
| Max total open risk | 4-5% | 6-10% |
| Max single position | 10% | 15% |
| Max sector exposure | 20% | 30% |
| Max correlated group | 3 positions | 5 positions |
Summary
Portfolio risk assessment looks beyond individual trades to understand your total exposure. Track total open risk, gross and net exposure, sector concentration, and position correlation. Stress test your portfolio against adverse scenarios. Set and enforce portfolio-level risk limits. Review daily before adding new positions. A well-managed portfolio survives market turbulence while still capturing opportunities. Remember: managing portfolio risk is just as important as managing individual trade risk.
Learn more: correlation in trading and portfolio diversification guide.