Concentration Indices

In financial risk applications, concentration is the opposite of diversification. If all or most of your risk is in one area, it is concentrated. Higher concentration is interpreted as a risk, although for someone with a high tolerance for risk and who wants higher returns, that person might prefer concentration.

You can use concentration indices to measure and monitor concentration in a credit portfolio. Ad-hoc concentration indices are typically computed by using exposures, and therefore do not usually take into account other risk parameters such as probabilities of default. Ad-hoc concentration indices are frequently included in comprehensive concentration reports, with other concentration measures and concentration limits.

When you use the concentrationIndices function, Risk Management Toolbox™ supports the following ad-hoc concentration indices or measures:

• Concentration ratio

• Deciles of the portfolio weight distribution

• Gini coefficient

• Herfindahl-Hirschman index

• Hannah-Kay index

• Hall-Tideman index

• Theil entropy index