Real risk wey dey inside one single stock

Concentration risk na the wahala wey dey follow if too much of your net worth dey ride for one single stock. One name fit move several times pass the broad market for one year, and e fit fall pass from im own high. This page dey measure both: the annualized volatility and the peak-to-trough drawdown of six well-known stocks wey dem set against the S&P 500 index, using the last year of minute-level data.

How much more one stock dey swing pass the index?

Volatility na the standard measure of how much price dey bounce around. Annualized realized volatility dey take the day-to-day percentage moves wey happen for one year and scale dem to one yearly figure. Higher number mean say swings wide pass for both directions. The index dey blend roughly 500 companies into one line, and their individual jumps dey partly cancel. So the blended line no dey travel as far as any of im parts.

SELECT ticker,
       round(stddevSamp(ret) * sqrt(252) * 100, 1) AS annual_vol_pct
FROM (
    SELECT ticker, dt,
           c / lagInFrame(c) OVER (PARTITION BY ticker ORDER BY dt) - 1 AS ret
    FROM (
        SELECT ticker,
               toDate(toTimeZone(window_start, 'America/New_York')) AS dt,
               argMax(toFloat64(close), toTimeZone(window_start, 'America/New_York')) AS c
        FROM global_markets.delayed_stocks_minute_aggs
        WHERE ticker IN ('SPY', 'KO', 'JNJ', 'PG', 'NVDA', 'TSLA', 'PLTR')
          AND window_start >= now() - INTERVAL 400 DAY
          AND (toHour(toTimeZone(window_start, 'America/New_York')) * 60
               + toMinute(toTimeZone(window_start, 'America/New_York'))) BETWEEN 570 AND 959
        GROUP BY ticker, dt
    )
)
WHERE ret IS NOT NULL AND dt >= today() - 370
GROUP BY ticker
ORDER BY annual_vol_pct

For the trailing year, the SPY ETF post the lowest reading for the group at 12.5%, and PLTR sit for the top with 51.4%. Every single stock for the 7-name comparison swing wide pass the index. Even the steadiest blue chips, the consumer-staples and healthcare names wey people dey see as sleepy, carry more year-long volatility pass the diversified basket. The gap dey open sharp-sharp for the high-growth names wey dey the right side of the chart. One single earnings night fit move the stock pass wetin the index go move for one month.

How far one single name fit fall?

Volatility dey count moves for both directions. Drawdown dey count only the painful one. Maximum drawdown na the biggest peak-to-trough drop wey happen for one window. E dey answer the question: "if I buy for the worst possible moment, how far underwater I go before the stock set new high?" For money wey you fit need for fixed timeline, drawdown dey often be the figure wey matter pass volatility.

SELECT ticker,
       round(abs(min(c / peak - 1)) * 100, 1) AS max_drawdown_pct
FROM (
    SELECT ticker, dt, c,
           max(c) OVER (PARTITION BY ticker ORDER BY dt
                        ROWS BETWEEN UNBOUNDED PRECEDING AND CURRENT ROW) AS peak
    FROM (
        SELECT ticker,
               toDate(toTimeZone(window_start, 'America/New_York')) AS dt,
               argMax(toFloat64(close), toTimeZone(window_start, 'America/New_York')) AS c
        FROM global_markets.delayed_stocks_minute_aggs
        WHERE ticker IN ('SPY', 'KO', 'JNJ', 'PG', 'NVDA', 'TSLA', 'PLTR')
          AND window_start >= now() - INTERVAL 400 DAY
          AND (toHour(toTimeZone(window_start, 'America/New_York')) * 60
               + toMinute(toTimeZone(window_start, 'America/New_York'))) BETWEEN 570 AND 959
        GROUP BY ticker, dt
    )
    WHERE dt >= today() - 370
)
GROUP BY ticker
ORDER BY max_drawdown_pct

The shallowest drawdown for the group na 8.5% and the deepest na 48.3%, for PLTR. The index and the blue-chip names dey sit near the shallow end of the chart. The high-growth names stretch across the deep end. Drawdown wey near 48.3% mean say portfolio wey dem build entirely on that one stock go don cut nearly in half for im low. E go need almost double to come back to even. The index own worst drop for the same window dey land among the calmest single names. E no dey with the deepest ones.

Wetin one stock path dey look like beside the index

Numbers for bar chart dey flatten the experience of holding position. This next panel dey index both one single high-flyer and the S&P 500 to 100 for the start of the window. E dey track dem month by month, and the two lines dey share starting point so you fit watch dem separate.

SELECT formatDateTime(mo, '%b %Y') AS month,
       round(anyIf(idx, ticker = 'SPY'), 1) AS spy_indexed,
       round(anyIf(idx, ticker = 'TSLA'), 1) AS tsla_indexed
FROM (
    SELECT ticker, mo,
           mclose / first_value(mclose) OVER (PARTITION BY ticker ORDER BY mo
               ROWS BETWEEN UNBOUNDED PRECEDING AND UNBOUNDED FOLLOWING) * 100 AS idx
    FROM (
        SELECT ticker, mo, argMax(c, dt) AS mclose
        FROM (
            SELECT ticker,
                   toStartOfMonth(toDate(toTimeZone(window_start, 'America/New_York'))) AS mo,
                   toDate(toTimeZone(window_start, 'America/New_York')) AS dt,
                   argMax(toFloat64(close), toTimeZone(window_start, 'America/New_York')) AS c
            FROM global_markets.delayed_stocks_minute_aggs
            WHERE ticker IN ('SPY', 'TSLA')
              AND window_start >= now() - INTERVAL 400 DAY
              AND (toHour(toTimeZone(window_start, 'America/New_York')) * 60
                   + toMinute(toTimeZone(window_start, 'America/New_York'))) BETWEEN 570 AND 959
            GROUP BY ticker, mo, dt
        )
        GROUP BY ticker, mo
    )
)
GROUP BY mo
ORDER BY mo

Both lines start for 100. Twelve-plus months later, the index finish near 120.2 and the single stock near 119.7, close to each other for the finish. The paths wey dey between no resemble each other at all. The index climb one fairly smooth staircase. The single name spike well above the index line, give most of am back, and swing through range wey wide pass several times before the two nearly meet again. Investor wey check the account only for the first day and the last day go see similar results. Anybody wey dey watch month to month, or wey need to sell during one of the deep dips, live one very different year.

Diversification na the counterweight

The diversified index dey sit for the low end of both volatility and drawdown for every panel here. E dey reach there through breadth: hundreds of independent outcomes wey dem average into one line, where the individual jumps dey partly cancel. To spread portfolio across holdings wey their ups and downs no dey move for lockstep dey pull the combined swing below the one of any single name wey dey inside am. Portfolio wey dem build from one stock, or several stocks for the same industry wey dey rise and fall together, dey carry the wide volatility and deep drawdown wey dem show above. E no be the index narrow ones.

When one single position too big to sell outright, im swing still fit get cap instead of to remove am. One protective put dey set floor under the holding, and one collar dey bracket am between floor and ceiling. The broad-market line for the panels above na the benchmark wey both the raw position and any hedge on am dey measured against.

FAQ

Wetin be concentration risk?

Concentration risk na the exposure wey dey come from holding too much of your wealth for one single stock, sector, or asset. If that one holding drop, nothing else for the portfolio go cushion am. The single-stock volatility and drawdown figures wey dey above dey quantify how much larger those swings dey run pass the one of diversified index.

How much more volatile one single stock be pass the S&P 500?

E dey vary by the stock. For the last year, the S&P 500 ETF annualized volatility na 12.5%, while the single names for the same window range reach 51.4% for PLTR. Every stock wey dem measure swing wide pass the index.

Diversification dey reduce risk?

To spread money across many holdings wey their ups and downs no dey move for lockstep dey lower the volatility and the drawdown of the combined portfolio versus any single holding. The index for the panels above na the clearest example. E post the lowest volatility of every line wey dem measure.

My own company stock be concentration risk?

If large share of your net worth, salary, or equity compensation depend on one company, yes. That single bet dey exist before you invest dollar anywhere else. To build the rest of the portfolio from the same or closely related stocks dey deepen the exposure. E no be to balance am.

Every panel above dey ship with the SQL wey dey behind am. Expand any one to audit the numbers, or measure your own holdings against the index for the Strasmore terminal. For the volatility concept in depth, see implied volatility, and for real market-wide drawdown, see the COVID crash of March 2020.