Sector Allocation

Sector allocation

Investment of certain proportions of a portfolio in certain sectors. See: Industry allocation.

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Sector Allocation

The act or practice of including securities in different industries in one's portfolio. This is done to reduce systemic risk. For example, if one includes both Industry A and Industry B stocks in one's portfolio, and most Industry A companies go bankrupt, this will not necessarily affect Industry B stocks. Industry allocation thus increases the possibility of making a profit, or at least avoiding a loss. This may also reduce the expected return on a portfolio, but it depends on the level and type of diversification. In general, the broader the industry allocation, the less risk and the less return. See also: Horizontal diversification, Vertical diversification.