Does the proposed trade diversify the relevant exposure or merely add a security name? This original fictional exercise focuses on connecting weights and a mandate to a concentration decision. The task is to build a before-and-after allocation and exposure memo, not copy a confident conclusion. It is not a live recommendation, client record or employer assessment.
The inputs and the question
Portfolio construction is about the mandate and exposures, not just the number of holdings. This guide uses a simple sector-weight example to make that distinction. It does not recommend a portfolio or prescribe a risk limit.
| Supplied item | Fictional input |
|---|---|
| Initial sector weights | 40%, 30%, 20%, 10% |
| Proposed additional security | 5% in the first sector |
| Funding source | 5% from the fourth sector |
| Resulting sector weights | 45%, 30%, 20%, 5% |
Use the supplied inputs together. When dates, units or definitions are not given, identify the gap rather than silently filling it with a convenient assumption. An actual assignment may require more detail than this deliberately limited case.
Work through the base case
The largest sector rises from 40% to 45%, despite adding a security. A simple sum-of-squared-sector-weights measure changes from 0.40² + 0.30² + 0.20² + 0.10² = 0.30 to 0.45² + 0.30² + 0.20² + 0.05² = 0.335.
This concentration measure is not volatility, correlation, a probability or a complete risk model. The sector definition and look-through treatment matter. More names can create the same underlying exposure.
The arithmetic or evidence check is only one part of the answer. Explain the definition that makes it valid and what remains outside the exercise. Do not convert a result from this case into a claim about a real company, market or client.
Change the assumption and follow the consequence
If the new 5% security instead belongs to a previously unrepresented sector and is funded from the largest sector, the weights become 35%, 30%, 20%, 10%, 5%; the squared-weight sum is 0.265.
Keep the unchanged inputs visible. State whether the change is an observed fact or a scenario you introduced. If the information needed to calculate a fuller result is missing, say what you would request instead of manufacturing precision.
The interpretation to avoid
Counting holdings, ignoring the funding leg or using a concentration statistic as a return forecast changes the decision.
A useful response names the limitation without abandoning the task. Show the part you can establish, then explain the condition or document needed for the next conclusion. Being explicit about that boundary is different from refusing to reason about the case.
Build the evidence artifact
Build a before-and-after exposure table, state the mandate and list unmeasured risks. Explain the trade and the funding source together.
Answer these questions before presenting it:
- What risk categories and look-through definitions matter to the mandate?
- Which existing holding funds the proposed allocation?
- What correlation, liquidity or derivative information is missing?
For your own practice, write the supplied facts, your method, the base result, the changed assumption and one unresolved question on a single page. Label professional work, public-data projects and fictional exercises accurately. Remove confidential data and do not use the example to imply a decision you did not own.
What to use next
Use the portfolio construction preparation guide to connect the exercise to a readiness and next-resource decision. Compare the adjacent preparation task if your gap is different. The primary-source background supplies concept or role context; the facts and worked exercise above are original and fictional.
The existing free research hub provides preparation context, not investment advice. Inspect scope before choosing support. A readable and reproducible explanation is the immediate objective; this case does not promise an interview, qualification, investment result or a particular search ranking.