Deciding how much to put in each holding so that no single position can do outsized damage, usually by scaling size to volatility.
Professional managers rarely size holdings equally. They set how much they are willing to lose on each idea and size the position so a move to the stop level loses about that much. A more volatile asset gets a smaller position.
Portfolio-level limits, on net and gross exposure, sector concentration and correlation, sit on top.
Why it matters
Risk management decides long-run results as much as idea selection does. A few large losses on oversized positions can undo many good decisions.
