RT Journal Article SR Electronic T1 Concentrating on Concentration JF The Journal of Portfolio Management FD Institutional Investor Journals SP 150 OP 159 DO 10.3905/jpm.2004.150 VO 30 IS 4 A1 Ross M. Curds YR 2004 UL https://pm-research.com/content/30/4/150.abstract AB Factor models seek to reduce the impact of spurious in-sample correlations on the estimation of a covariance matrix of security returns. Among U.S. equities, market value is concentrated in a small number of assets both across the market and within industry sectors. Over 50% of market value, for example, is captured by 1% of assets. This can unwittingly compromise factor model design and result in a significant misprediction of portfolio risk. Correlations may be induced between the specific returns of high-cap securities as an artefact of regression procedures. There are solutions to avoid such mistakes and thus improve the efficacy of risk predictions.