Formula & Calculator
Portfolio Concentration Index (Herfindahl)
Measures how concentrated (versus diversified) a crypto portfolio is by summing the squares of each asset's percentage weight.
Interpretation
HHI = Σ(Asset Weight%)². A measure of portfolio concentration. Higher HHI means more concentration. Used to assess diversification.
Variables
| Symbol | Quantity | Unit |
|---|---|---|
| HHI | Herfindahl-Hirschman concentration index | |
| Asset Weight% | Percentage weight of each asset in the portfolio | % |
What it means
The Herfindahl‑Hirschman Index (HHI) is a measure of market concentration. In portfolios, it quantifies diversification: a lower HHI indicates better diversification. Values range from 0 to 1 (or 0 to 10,000 if using percentages). This is used by investors to assess risk and to guide rebalancing. Understanding this helps in building well‑diversified portfolios and in managing concentration risk.
Worked example
Portfolio Concentration Index – Two Detailed Examples
Real‑World| Parameter | Value |
|---|---|
| Weights | 100% in one asset |
| Parameter | Value |
|---|---|
| Weights | 10% each in 10 assets |
Common mistakes
- HHI: Herfindahl‑Hirschman Index – measures portfolio concentration.
- Asset weight %: The percentage of each asset in the portfolio (as a fraction).
- Result: Between 0 and 1; closer to 1 means highly concentrated.
- Diversification: Lower HHI indicates better diversification.
Applications
Portfolio concentration index (Herfindahl) is the sum of squared asset weights, measuring the concentration of a portfolio. Higher values indicate less diversification. Investors use it to assess their exposure to single assets and to manage risk. By monitoring the index, they can ensure adequate diversification. A lower HHI reduces the impact of a single asset's performance. Understanding this index is essential for building a balanced portfolio.
- Measuring portfolio diversification and concentration
- Risk management and asset allocation
- Comparing portfolio concentration across investors
- Identifying over‑exposure to a single asset
- Educational understanding of diversification metrics
Frequently Asked Questions
HHI = Σ(Asset Weight%)². For example, if a portfolio is 100% in one asset, HHI = 100² = 10,000 (or 1.0 if using decimals). For two assets at 50% each, HHI = 50² + 50² = 5,000. Lower HHI means more diversification.
A value below 1,500 (if using percentages) is considered well-diversified. Between 1,500 and 2,500 is moderately concentrated. Above 2,500 is highly concentrated. For decimals, below 0.15, 0.15-0.25, above 0.25.
High concentration increases risk because a drop in a single asset can significantly hurt your portfolio. Diversification helps spread risk across multiple assets.
No, it only measures the distribution of weights. Two portfolios with the same HHI can have very different risk levels if their assets are highly correlated.
By rebalancing to a more equal distribution of weights. For example, if you are heavily in BTC, consider adding ETH, SOL, or other uncorrelated assets.
Many investors aim for HHI below 1,500 (or 0.15 in decimal). This is considered a balanced portfolio. However, personal risk tolerance may dictate a different target.
The effective number of assets can be approximated as 1 / HHI (in decimal). For example, HHI of 0.25 corresponds to an effective N of 4. This is a useful interpretation.
Yes, it provides a standardised measure of concentration. Lower HHI generally indicates better diversification, but you should also consider the asset classes and correlations.