Sector allocation

Sector allocation

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

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.