Look through sector labels
Begin with customer demand and financing rather than a stock exchange sector code. For a building-material supplier, identify the share of sales linked to construction; for a lender, the portion of its loan book exposed to the same borrowers. These percentages have different denominators, so do not add them together. Translate each exposure into a separate scenario for that holding’s cash flow or value, then combine the estimated effects using portfolio weights.
Apply one shock to all related positions
Consider three fictional holdings weighted at 40%, 35% and 25%. In a common housing downturn, assume hypothetical price changes of minus 12%, minus 8% and plus 2%. The weighted result is minus 7.1% before costs: the contributions are minus 4.8, minus 2.8 and plus 0.5 percentage points. These moves are assumptions, not estimated probabilities or forecasts. Repeating the exercise with alternative shocks reveals which single assumption dominates the result.
Test the protection that remains
A holding that offset losses in one period may stop doing so when funding conditions or currency movements change. Look at the combined direct and fund-held exposure to the same issuer, then at shared customers, lenders and currencies. An investment with infrequent reported prices may appear stable simply because quotations are stale. A concentration review is stronger when it identifies both a potential offset and a plausible circumstance in which it fails.
Practical check
For the largest three positions, name one common source of risk, calculate their combined scenario contribution and record why an apparent hedge could fail.