Market Exposure

What Is Market Exposure?

Market exposure alludes to the dollar amount of funds or percentage of a more extensive portfolio that is invested in a specific type of security, market sector, or industry. Market exposure is normally communicated as a percentage of total portfolio holdings, for example, as in 10% of a portfolio being presented to the oil and gas sector or a $ 50,000 in Tesla stock.

Market exposure addresses the amount an investor can lose from the risks unique to a specific investment or asset class. It is a tool used to measure and balance risk in an investment portfolio. Having too much exposure to a specific area can show a portfolio needs to go through more extensive diversification.

Grasping Market Exposure

Market exposure portrays the risk and reward potential for an investor given the division of assets inside an investment portfolio. The extent of assets invested in some random asset class, market segment, geographic region, industry, or stock can be utilized to measure the degree to which the investor is presented to expected loss due to those specific assets. "

Market exposure can be isolated in view of various factors that then, at that point, permits an investor to alleviate the risks implied in certain investments by adjusting exposure through diversification to other asset classes, regions, or industries. The greater one's market exposure, the greater their total market risk in that specific investment area. A concentration of market exposure in any one area can lead to large losses assuming that area ends up getting hit hard.

Market Exposure by Investment Type

Investments can be segmented in light of the type of asset class included. For instance, a portfolio can comprise of 20% bonds and 80% stocks. The investor's market exposure to stocks is subsequently 80%. This investor stands to lose or gain more contingent upon how stocks perform than from how bonds perform.

Market Exposure by Region

While looking at the market exposure in a portfolio, an investor can likewise look at holdings by geographic location. This might incorporate isolating domestic investments from those of foreign economies, or further separating foreign markets by their specific region in the world or as emerging markets.

For instance, an investor could have a portfolio that is allocated to half domestic and half foreign stocks. On the off chance that extra exposure separation is wanted, the foreign holdings might be partitioned further to show 30% in Asian markets and 20% in European markets. Besides, we can portray the Asian segment as allocated half to developed and emerging markets each.

Market Exposure by Industry Segment

Investments can likewise be split by the industry or economic sector inside which the underlying companies operate.

Utilizing the above speculative investor's 80% market exposure to stocks, there may be a 30% market exposure to the medical care sector, 25% exposure to the technology sector, 20% to the financial services sector, 15% to the defense sector, and 10% to the energy sector. The portfolio's returns are more impacted by medical services stocks than by energy stocks in light of the greater market exposure to the former.

Exposure, Diversification, and Risk Management

The exposure of a portfolio to specific securities, markets, or sectors must be thought about while deciding a portfolio's overall asset allocation since diversification can significantly increase returns while likewise limiting losses. For example, a portfolio with both stock and bond holdings that incorporates market exposure to the two types of assets commonly has less risk than a portfolio with exposure just to stocks. As such, diversification in this way reduces market exposure risks.

This applies to designating assets across various asset classes or industries. Utilizing the previously mentioned model, to reduce high market exposure to medical services on account of major changes in the industry brought by new federal regulations, selling half of those holdings reduces that specific exposure to 15%.

Highlights

Market exposure is the extent of one's assets that are tied up in a class of securities, a specific industry, or a geographic market.
Market exposure can be partitioned in different ways to gain understanding into the risks presented to investors across various types of markets.
Measuring and adjusting market exposure across all assets in a diversified portfolio is a key part of overseeing total risk.