Measuring Risk in Concentrated Investment Portfolios

Your client, a high-net-worth individual, has a highly concentrated portfolio consisting primarily of a single stock that constitutes 80% of their total investments. In the current market environment, characterized by increased volatility and economic uncertainty, they are seeking your expertise in understanding the risk associated with their investment strategy. They have a personal benchmark for required returns that is significantly above the market average, and they have begun to express concern about potential drawdowns and the impact of market fluctuations on their portfolio value.

In your response, discuss and evaluate the following:

1. Quantitative methods for measuring risk, including Value-at-Risk (VaR) and stress testing, specifically as they apply to concentrated positions.
2. The implications of concentration risk and the potential behavioral biases that may affect your client’s decision-making process regarding portfolio adjustments.
3. Scenario analysis and the importance of assessing correlated risk exposures in the context of a concentrated position in a single stock.

Your answer should provide a comprehensive analysis, integrating both quantitative and qualitative approaches to risk measurement in portfolios heavily concentrated in particular securities.