Market Exposure

What is 'Market Exposure'

The dollar amount of funds or percentage of a portfolio invested in a particular type of security, market sector or industry, which is usually expressed as a percentage of total portfolio holdings. Market exposure, also known as “exposure,” represents the amount an investor can lose from the risks unique to a particular investment.

BREAKING DOWN 'Market Exposure'

The greater the market exposure, the greater the market risk. For example, in a portfolio consisting of 20% bonds and 80% stocks, the investor’s market exposure to stocks is 80%. This investor stands to lose or gain more depending on how stocks perform than from how bonds perform.

Within this investor’s 80% market exposure to stocks, there might be a 30% market exposure to the health-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 will be more influenced by health-care stocks than by energy stocks because of the greater market exposure to the former.

The exposure of a portfolio to particular securities/markets/sectors must be considered when determining a portfolio’s asset allocation since it can greatly increase returns and/or minimize losses. For example, a portfolio with both stock and bond holdings—that is, market exposure to both types of assets—will typically have less risk than a portfolio with exposure only to stocks. In other words, diversification reduces market-exposure risks.

If our investor wanted to reduce high market exposure to health care because of major changes in the industry brought by new federal legislation, selling 50% of those holdings would reduce exposure to 15%.

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