Market Exposure

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS '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%. 

RELATED TERMS
  1. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected ...
  2. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  3. Financial Exposure

    The amount that one stands to lose in an investment. For example, ...
  4. Company Risk

    The financial uncertainty faced by an investor who holds securities ...
  5. Dynamic Gap

    Refers to asset and liability risk management at financial institutions. ...
  6. Asset Allocation

    An investment strategy that aims to balance risk and reward by ...
Related Articles
  1. Investing Basics

    Introduction To The Portfolio Dedicated Strategy

    Dedicated Investment Portfolio strategies have been used by institutional investors like pension funds and insurance companies for many years and have gained some popularity with individual investors ...
  2. Personal Finance

    Rebalance Your Portfolio To Stay On Track

    Like a tune-up for a car, this re-alignment should minimize trouble down the road.
  3. Investing Basics

    Broadening Your Portfolio's Borders

    Find out what type of international fund might suit your needs in gaining exposure to foreign markets.
  4. Investing Basics

    Calculating Beta: Portfolio Math For The Average Investor

    Beta is a useful tool for calculating risk, but the formulas provided online aren't specific to you. Learn how to make your own.
  5. Investing Basics

    Diversification: Protecting Portfolios From Mass Destruction

    This investing strategy retains its charm as a protection against random events in the market.
  6. Options & Futures

    6 Asset Allocation Strategies That Work

    Your portfolio's asset mix is a key factor in whether it's profitable. Find out how to get this delicate balance right.
  7. Investing Basics

    5 Things To Know About Asset Allocation

    Overwhelmed by investment options? Learn how to create an asset allocation strategy that works for you.
  8. Forex Education

    Managing Currency Exposure In Your Portfolio

    The value of your investments is impacted by changes in global currency exchange rates. Find out how.
  9. Fundamental Analysis

    The Role Of Rebalancing

    A disciplined rebalancing practice can add a lot of value to a long-term strategic asset allocation program.
  10. Insurance

    The Dangers Of Over-Diversifying Your Portfolio

    If you diversify too much, you might not lose much, but you won't gain much either.

You May Also Like

Hot Definitions
  1. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  2. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  3. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  4. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  5. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  6. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
Trading Center