What you will learn
- Shared factors
- Net versus gross
- Liquidity concentration
- Hidden leverage
Shared factors
Aggregate exposure in consistent units before applying risk summaries. Several positions with different labels can reference the same underlying factor. Gross, net and factor-adjusted views answer different questions and should not be conflated.
Net versus gross
Correlation measures association over a specified sample and horizon. It can change during stress. A low historical average does not prove that positions cannot lose together when liquidity or common drivers change.
Liquidity concentration
Nonlinear positions require scenario repricing or suitable sensitivity analysis. Summing notional values alone can miss option convexity or basis exposure. State the approximation and where it may break down.
Hidden leverage
Concentration can arise by instrument, strategy, counterparty, session or data dependency. Diversifying entry rules does not necessarily diversify the failure source if all rely on the same feed or funding channel.
Worked example
Three strategies each hold a long gold position. Separate strategy names do not make the aggregate exposure diversified against a gold decline. The account holds the combined position under the relevant units.
Try it yourself
Build a risk inventory that groups positions by both market factor and operational dependency.
Show the worked solution
List quantities, multipliers, currencies and direction, then identify shared underlying drivers, counterparties and data or execution services. Keep gross and net measures explicit and note nonlinear or uncertain relationships.
Apply this to your course project
Produce a scenario-based portfolio risk dossier.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.