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:
Deciles of the portfolio weight distribution
Theil entropy index